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SuperValu - Safer and Cheaper Now

February 01, 2012 | About:
Barel Karsan

Barel Karsan

17 followers
Several quarters ago, SuperValu was discussed on this site as a potential opportunity for regular investors to participate in what looked like a leveraged-buyout type investment play. A few months after that article, shares were higher by about 25%. But today, shares of SuperValu can be had for 20% cheaper than their price when that article was published, even though the company is less risky now than it was then!

The biggest risk to this company is its large debt load (as is common in LBO situations). This is what the company's debt maturities looked at the time of the original article (note that the company generates about $1 billion per year in operating cash flow):

Slide1.JPG

Fast forward a few quarters, and now added to the above chart are the debt maturities the company faces today (in red):

Slide2.JPG

Through a combination of repayments (from SuperValu's ability to generate steady cash flow) and refinancing, the company looks a lot safer today. But even though the debt is lower, so is the market value of equity! With operating income steady at around $1 billion per year (adjusted for Goodwill and intangible write-downs that were created through acquisitions of a previous management), this leads to an EV/EBIT ratio of just 7.5.

With further debt repayments on the way (management expects to pay down $750 million more over the next two years from internally generated funds), that ratio should continue to shrink unless the market value of equity rises or EBIT falls. On future EBIT, the company's cost-cutting efforts are going well, which has allowed SuperValu to cut prices while maintaining margins. This should lead to increased competitiveness, holding the company's EBIT steady at the very least.

SuperValu's LBO-like characteristics are still present, but the company is safer and cheaper now than it was in the past. This opportunity may offer strong upside potential for those willing to take on a bit of downside risk.

* Note that the charts do not include SuperValu's capital lease obligations of approximately $1 billion

Disclosure: Author has a long position in shares of SVU

About the author:

Barel Karsan
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.5/5 (16 votes)

Comments

ssg280
Ssg280 - 2 years ago
I agree that it's cheaper. But I disagree that it's cheap enough - my conservative DCF doesn't provide me any comfort at today's price of $6.60. I've looked at SVU a number of times over the past year as the stock has tanked and my gut keeps telling me to take a pass. I find the upside story here to be low-probability, without a catalyst, and high risk - hardly qualities of a stock with a margin of safety.

I could be wrong - it's just not the type of value stock I like to invest in.
hheffermehl
Hheffermehl - 2 years ago
ssg280: what does your DCF imply? In your opinion, at what price would you see a sufficient margin of safety? I find that even with virtually zero growth, the company is undervalued based on normalized earnngs power. The debt burden is significant though and negative sentiment on covenant issues may depress this stock severely in the short term. I have no pos in this stock at this time - still making up my mind.
superguru
Superguru - 2 years ago
My fair value a year back when I looked at it was $6.46. My fair values are always at the lower end of the range.

Right price can even make CRAP look interesting.

Now SVU price ($4.65) looks interesting. But as just mentioned price only one component.

I agree with ssg280, it is not a kind of value stock I like to buy. And it is not an industry I want to venture in.

Only company I would look in this industry is TESCO (TSCDY).
superguru
Superguru - 2 years ago
Definitely getting cheaper. Not so sure about safer yet though.

(I have no interest in going long this stock)

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