I have recently notice this stock while surfing the internet. This stock looks interesting because it has a good quarterly earning and a very low PE ratio. Although, I am currently heavily invested in Cisco, I would like to know more about this stock and why it keeps going down eventhough it looks like a good stock to me.
For the current short term outlook, this stock is definetely a buy on the 3 technical indicator that I have always relied on.
As shown above the MACD indicator shows that the histogram is currently going up with a nice upward slope. As per the line, the blue line has crossed over above the red line and it does not shown any sign of weaknesses yet.
As per the Stochastic indicator, it shows that the blue like is moving upward above the red line with a strong push. I believe the blue line will at least reach the upper side of the 80% before it start consolidating downward again.
As per the Bollinger Band, it is currently at the slightly upper middle level of the band, I believe that it will go to the upper side of the band which is around $9.6 level in the very near future.
Fundamental Analysis:
Based on the last four quarter earning, eventhough it does show a little bit of decreasing in the last quarter, however, I believe that the coming quarter will be improved together with the US economy.
Quarter 3, 2010 = 0.46
Quarter 4, 2010 = 0.62
Quarter 1, 2011 = 0.43
Quarter 2, 2011 = 0.28
Analysis from the other authors on this stock also indicated a buy for this stock whether in short or long term. I think this stock has a very good potential as the earning are still there and moreover, the dividend for this stock is also attractive. I have invested less and 10% of more total capital in this stock. I am thinking of shifting my capital from Cisco into this stock on this coming Monday.
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SuperValu: Leveraged Buy-Out For Retail Investors
By Barel Karsan
Have you ever wanted to participate in a leveraged buyout (LBO), but lacked the capital, the management expertise, and the lenders willing to finance most of the purchase? You are in luck! SuperValu (SVU), at today's prices, has almost all of the characteristics of an LBO without actually being an LBO. This is an important distinction, because it gives you the opportunity to participate.
LBO's are best done on companies with consistent cash flows, as these cash flows will be relied upon to reduce the debt used to finance the purchase. SuperValu has got the cash flow consistency. Demand for groceries does not go away no matter what goes on with the economy, and as a diversified retail grocery chain (operating under a number of banners including Acme, Albertsons, Bristol Farms, Cub Foods, Farm Fresh, Hornbacher's, Jewel-Osco, Lucky, Save-A-Lot, Shaw's, Shop 'n Save, Shoppers Food & Pharmacy and Star Market), SuperValu has generated positive operating margins year after year with little fluctuation. (The red ink on the income statements reflects Goodwill write-downs from past purchases, and do not affect the company's
cash flows.)
LBO's are also characterized by having a strong, motivated management team to increase efficiency. To that end, SuperValu hired away Wal-Mart's CEO of the Americas to serve as the company's chief executive. Since his hiring in 2009, the CEO has applied cash flows to pay down debt: in the last three quarters, the company has generated about $1.4 billion in cash from operations, and applied over $1 billion of that to debt repayment. He has also implemented initiatives aimed at improving operations, including centralizing marketing, reducing SKUs, and reducing prices. Eighty-six percent of his pay is performance based.
LBO's are also characterized by large debt obligations relative to equity. This is what allows for the large upside for equity owners (profits beyond what is needed to pay off debt accrues to a small amount of equity, resulting in the potential for big returns), but it also represents the biggest risk to the enterprise. Again, SuperValu fits right into the LBO pattern: the company has total debt of $7.1 billion, compared to a market cap of just $1.8 billion.
To understand the threat to SuperValu posed by the company's debt, it's important to consider how well the company is able to service its debt obligations. Interest coverage looks okay, as EBIT/interest is around 2, and EBITDA/interest is around 4. But principal repayments appear to be more of a threat, as some of the company's long-term debt is coming due quite soon. The following chart depicts the company's debt obligations over the next several calendar years:
The company only generates operating income of just over $1 billion, so the repayments due in 2011 loom quite large. Additionally, the company has a total of around $1 billion of capital leases due over the next several years which are not included in the chart above. But store refreshes are essential in retail, and this debt repayment schedule does not allow for much re-investment in the business, which is crucial to sustaining cash flow in the future. The company is also experiencing success with its Save-A-Lot banner, and therefore plans to spend capital to open a number of such stores in the coming year.
So how can the company meet its obligations and run the business successfully? Using its bank revolver. The company has a revolving line of credit expiring in 2015 under which it still has $1.7 billion available. As such, whatever it cannot pay off in 2011, it can borrow from the revolver. Adjusting the above chart for this revolver makes the debt schedule look as follows:
This gives the company a lot of breathing room in the near term. But it doesn't mean the company's debt is not a threat. What it does do, however, is allow the company to make the capital expenditures it needs to improve the business. Capex not required by the business (which appears to be most of the company's operating cash flow, judging from management's actions) can still go towards paying off debt.
Finally, the company has also been selling under-performing assets in order to generate cash. This helps both accelerate debt payments and make the company more profitable.
The price of the entire Supervalu enterprise (debt + equity) is around $9 billion, against earnings before interest, taxes and non-cash writedowns of about $1.1 billion, for an EV/EBIT ratio of about 8. Since SuperValu has both the breathing room and the cash flows to make the debt repayments and capital expenditures it needs to, the company should see an increase in the market value of its shares even if its enterprise value were to fall.
Read more: http://www.benzinga.com/10/12/696544/supervalu-leveraged-buy-out-for-retail-investors#ixzz18JBP39IG
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I've Uncovered a Trade That Could Pay off Big...
Posted 12/8/2010 12:00 PM by David Sterman from David Sterman in Investing
The rules of a paired trade are quite simple. Find a good company and make a bullish investment while also finding a lousy company in the same industry and make a bearish short investment against it.
That logic surely applies when two companies appear comparably valued. But what do you do when the solid operator appears quite overpriced and the lousy operator appears to be far too cheap? Well, you have to turn the paired trade theory on its head.
That's precisely the dynamic in place in the supermarket industry. Whole Foods (Nasdaq: WFMI ) is a very well-managed company with a stellar track record. Supervalu (NYSE: SVU ) has clearly been the dog of the industry for quite some time. Yet this dog may soon have it day, and paradoxically is the better investment.
Differing business models... for now
Whole Foods has single-handedly altered what consumers think of in terms of grocery stores. Its emphasis on healthy foods in an inviting shopping environment has allowed it to charge premium prices. That's why it can generate 5% EBITDA margins while most grocers must make do with 2% to 3% margins -- at best. And business at Whole Foods has rebounded impressively in 2010, despite a still-weakeconomy . Moreover, Walmart's (NYSE: WMT ) aggressive push into groceries has surely hurt business at traditional supermarket chains like Supervalu and Kroger (NYSE: KR ) to a much greater extent than Whole Foods.
That helps explain why Whole Foods is boosting revenue at a +10% clip (aided by store openings), while Supervalu's sales are shrinking more than -5% (partially due to selective store closings). But food retailing is a funny business. Grocery chains can -- and often do -- re-invent themselves. By upgrading stores, changing the merchandise mix and tinkering with pricing, they can alter the perception among consumers and draw back lost shoppers. And that's precisely what Supervalu is doing, spending more than $500 million in the current fiscal year to remodel stores. (Despite that spending, the company will still generate more than $1 billion in free cash flow this year, according to UBS.)
It will be likely be several years before consumer perceptions of Supervalu's stores can improve, so you shouldn't look for it to morph into an industry leader overnight. Nor should you expect this company to eventually be seen in the same light as Whole Foods, which has a strong grip on the premium end of the market. That said, as rivals like Supervalu and Kroger try to replicate the look and feel of successful grocers like Whole Foods, all of the players should see their operating metrics revert to the mean.
By the numbers
Even before Supervalu takes steps to improve results, itsshares are already stunningly cheap by a variety of investment metrics. For example, it trades for less than six times projectedearnings -- that's one-fifth of the multiple garnered by Whole Foods. And both of these companies are comparably valued in terms of enterprise value , even though Supervalu's sales base is four times as large and its EBITDA is twice as high.
Shares of Supervalu are also in the doghouse because of a stubbornly high debt load , which still exceeds $6 billion. The company's equity is worth less than $2 billion. And that, in a nutshell, is the primary reason why you should be bullish on Supervalu, even as its operations stumble right now. Any company with very high levels of debt often sees its equity come under pressure due to concerns about potential financial distress. But Supervalu, even with its subpar results, generates ample cash flow to cover its interest expenses and take down some principal . So over time, that debt load is likely to shrink, taking the total enterprise value down with it.
For example, let's say Supervalu reduces debt from $6 billion to $4 billion in the next three years thanks to operating cash flow and selective asset sales. For its enterprise value to stay constant, equity would rise by a commensurate amount that the debt falls. That means its market value would rise from the current $1.8 billion to $3.5 or $4.0 billion.Shares would likely double from this -- without the company's enterprise value changing one iota.
There's a decent chance that Supervalu won't be around as a public company long enough to see that change. Rumors have popped up that private equity (PE) firms are sniffing around. Yes, this grocer has more debt than PE shops would like, but the cash flow capabilities relative to its existing debt load are awfully enticing. I have no idea if the rumors are true, but the logic is solid.
Action to Take --> It's hard to see howshares of Whole Foods can rise any higher, already trading for nearly 30 times projected fiscal (September) 2011 results. If anything,shares are vulnerable to a slow downward drift as other grocers start to replicate its business model . If you want to use a paired trade strategy, that's the short side of it.
Meanwhile, on the long side,shares of Supervalu look significantly undervalued in the context of the grocer's still-strong cash flow. Management needs to proceed with some financial engineering to unlock shareholder value. But withshares now trading at levels last seen in 1990, they get the message.
-- David Sterman
==========================================================Posted 12/8/2010 12:00 PM by David Sterman from David Sterman in Investing
The rules of a paired trade are quite simple. Find a good company and make a bullish investment while also finding a lousy company in the same industry and make a bearish short investment against it.
That logic surely applies when two companies appear comparably valued. But what do you do when the solid operator appears quite overpriced and the lousy operator appears to be far too cheap? Well, you have to turn the paired trade theory on its head.
That's precisely the dynamic in place in the supermarket industry. Whole Foods (Nasdaq: WFMI ) is a very well-managed company with a stellar track record. Supervalu (NYSE: SVU ) has clearly been the dog of the industry for quite some time. Yet this dog may soon have it day, and paradoxically is the better investment.
Differing business models... for now
Whole Foods has single-handedly altered what consumers think of in terms of grocery stores. Its emphasis on healthy foods in an inviting shopping environment has allowed it to charge premium prices. That's why it can generate 5% EBITDA margins while most grocers must make do with 2% to 3% margins -- at best. And business at Whole Foods has rebounded impressively in 2010, despite a still-weakeconomy . Moreover, Walmart's (NYSE: WMT ) aggressive push into groceries has surely hurt business at traditional supermarket chains like Supervalu and Kroger (NYSE: KR ) to a much greater extent than Whole Foods.
That helps explain why Whole Foods is boosting revenue at a +10% clip (aided by store openings), while Supervalu's sales are shrinking more than -5% (partially due to selective store closings). But food retailing is a funny business. Grocery chains can -- and often do -- re-invent themselves. By upgrading stores, changing the merchandise mix and tinkering with pricing, they can alter the perception among consumers and draw back lost shoppers. And that's precisely what Supervalu is doing, spending more than $500 million in the current fiscal year to remodel stores. (Despite that spending, the company will still generate more than $1 billion in free cash flow this year, according to UBS.)
It will be likely be several years before consumer perceptions of Supervalu's stores can improve, so you shouldn't look for it to morph into an industry leader overnight. Nor should you expect this company to eventually be seen in the same light as Whole Foods, which has a strong grip on the premium end of the market. That said, as rivals like Supervalu and Kroger try to replicate the look and feel of successful grocers like Whole Foods, all of the players should see their operating metrics revert to the mean.
By the numbers
Even before Supervalu takes steps to improve results, itsshares are already stunningly cheap by a variety of investment metrics. For example, it trades for less than six times projectedearnings -- that's one-fifth of the multiple garnered by Whole Foods. And both of these companies are comparably valued in terms of enterprise value , even though Supervalu's sales base is four times as large and its EBITDA is twice as high.
Shares of Supervalu are also in the doghouse because of a stubbornly high debt load , which still exceeds $6 billion. The company's equity is worth less than $2 billion. And that, in a nutshell, is the primary reason why you should be bullish on Supervalu, even as its operations stumble right now. Any company with very high levels of debt often sees its equity come under pressure due to concerns about potential financial distress. But Supervalu, even with its subpar results, generates ample cash flow to cover its interest expenses and take down some principal . So over time, that debt load is likely to shrink, taking the total enterprise value down with it.
For example, let's say Supervalu reduces debt from $6 billion to $4 billion in the next three years thanks to operating cash flow and selective asset sales. For its enterprise value to stay constant, equity would rise by a commensurate amount that the debt falls. That means its market value would rise from the current $1.8 billion to $3.5 or $4.0 billion.Shares would likely double from this -- without the company's enterprise value changing one iota.
There's a decent chance that Supervalu won't be around as a public company long enough to see that change. Rumors have popped up that private equity (PE) firms are sniffing around. Yes, this grocer has more debt than PE shops would like, but the cash flow capabilities relative to its existing debt load are awfully enticing. I have no idea if the rumors are true, but the logic is solid.
Action to Take --> It's hard to see howshares of Whole Foods can rise any higher, already trading for nearly 30 times projected fiscal (September) 2011 results. If anything,shares are vulnerable to a slow downward drift as other grocers start to replicate its business model . If you want to use a paired trade strategy, that's the short side of it.
Meanwhile, on the long side,shares of Supervalu look significantly undervalued in the context of the grocer's still-strong cash flow. Management needs to proceed with some financial engineering to unlock shareholder value. But withshares now trading at levels last seen in 1990, they get the message.
-- David Sterman
Should You Sell SUPERVALU Today?
Should you sell SUPERVALU (NYSE: SVU) today?
The decision to sell a stock you've researched and followed for months or years is never easy. If you fall in love with your stock holdings, you risk becoming vulnerable to confirmation bias -- listening only to information that supports your theories, and rejecting any contradictions.
In 2004, longtime Fool Bill Mann called confirmation bias one of the most dangerous components of investing. This warning has helped my own personal investing throughout the Great Recession. Now, I want to help you identify potential sell signs on popular stocks within our 4-million-strong Fool.com community.
Today, I'm laser-focused on SUPERVALU, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!
Don't sell on priceOver the past 12 months, SUPERVALU is down 32.6% versus an S&P 500 return of 11.3%. Investors in SUPERVALU are no doubt disappointed with their returns, but is now the time to cut and run? Not necessarily. Short-term underperformance alone is not a sell sign. The market may be missing the critical element of your SUPERVALU investing thesis. For historical context, let's compare SUPERVALU's recent price with its 52-week and five-year highs. I've also included a few other businesses in the same or related industries:
Source: Capital IQ, a division of Standard & Poor's.
As you can see, SUPERVALU is down from its 52-week high. If you bought near the peak, now's the time to think back to why you bought it in the first place. If your reasons still hold true, you shouldn't sell based on this information alone.
Potential sell signsFirst, let's look at the gross margins trend, which represents the amount of profit a company makes for each $1 in sales, after deducting all costs directly related to that sale. A deteriorating gross margin over time can indicate that competition has forced the company to lower prices, that it can't control costs, or that its whole industry's facing tough times. Here is SUPERVALU's gross margin over the past five years:
Source: Capital IQ, a division of Standard & Poor's.
SUPERVALU has been able to grow its gross margin, which tends to dictate a company's overall profitability. This is great news; however, SUPERVALU investors need to keep an eye on this over the coming quarters. If margins begin to drop, you'll want to know why.
Next, let's explore what other investors think about SUPERVALU. We love the contrarian view here at Fool.com, but we don't mind cheating off of our neighbors every once in a while. For this, we'll examine two metrics: Motley Fool CAPS ratings and short interest. The former tells us how Fool.com's 170,000-strong community of individual analysts rates the stock. The latter shows what proportion of investors are betting that the stock will fall. I'm including other peer companies once again for context.
Source: Capital IQ, a division of Standard & Poor's.
The Fool community is in the middle of the road on SUPERVALU. We typically like to see our stocks rated at four or five stars. Anything below that is a less-than-bullish indicator. I highly recommend you visit SUPERVALU's stock pitch page to see the verbatim reasons behind the ratings.
Here, short interest is at a high 11.7%. This typically indicates that large institutional investors are betting against the stock.
Now, let's study SUPERVALU's debt situation, with a little help from the debt-to-equity ratio. This metric tells us how much debt the company has taken on, relative to its overall capital structure.
Source: Capital IQ, a division of Standard & Poor's.
SUPERVALU has taken on substantial debt over the past five years. Even with increasing total equity over the same time period, debt-to-equity has increased, as seen in the above chart. Based on the trend alone, that's a bad sign. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry. SUPERVALU is above this level, at 513.5%.
The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If SUPERVALU had to convert its current assets to cash in one year, how many times over could the company cover its current liabilities? As of the latest filing, SUPERVALU has a current ratio of 0.85. This is a bad sign for SUPERVALU. The company's current liabilities are greater than its current assets, which means it could have liquidity issues in the short term.
Finally, it's highly beneficial to determine whether SUPERVALU belongs in your portfolio -- and to know how many similar businesses already occupy your stable of investments. If you haven't already, be sure to put your tickers into Fool.com's free portfolio tracker, My Watchlist. You can get started right away by clicking here to add SUPERVALU.
The recap
SUPERVALU has failed four of the quick tests that would make it a sell. Does it mean you should sell your SUPERVALU shares today solely because of this? Not necessarily, but keep your eye on these trends over the coming quarters.
Remember to add SUPERVALU to My Watchlist to help you keep track of all our coverage of the company on Fool.com.
If you haven't had a chance yet, but sure to read this article detailing how I missed out on more than $100,000 in gains through wrong-headed selling.
=======================================================
The author is the founder and managing director of Jx Capital Management, a long / short equity derivatives hedge fund
The decision to sell a stock you've researched and followed for months or years is never easy. If you fall in love with your stock holdings, you risk becoming vulnerable to confirmation bias -- listening only to information that supports your theories, and rejecting any contradictions.
In 2004, longtime Fool Bill Mann called confirmation bias one of the most dangerous components of investing. This warning has helped my own personal investing throughout the Great Recession. Now, I want to help you identify potential sell signs on popular stocks within our 4-million-strong Fool.com community.
Today, I'm laser-focused on SUPERVALU, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!
Don't sell on priceOver the past 12 months, SUPERVALU is down 32.6% versus an S&P 500 return of 11.3%. Investors in SUPERVALU are no doubt disappointed with their returns, but is now the time to cut and run? Not necessarily. Short-term underperformance alone is not a sell sign. The market may be missing the critical element of your SUPERVALU investing thesis. For historical context, let's compare SUPERVALU's recent price with its 52-week and five-year highs. I've also included a few other businesses in the same or related industries:
Company | Recent Price | 52-Week High | 5-Year High |
|---|---|---|---|
| SUPERVALU | $10.73 | $17.89 | $49.80 |
| Kroger (NYSE: KR) | $22.01 | $24.12 | $31.90 |
| Safeway (NYSE: SWY) | $22.75 | $27.04 | $38.30 |
| Whole Foods Market (Nasdaq: WFMI) | $39.85 | $43.18 | $79.90 |
As you can see, SUPERVALU is down from its 52-week high. If you bought near the peak, now's the time to think back to why you bought it in the first place. If your reasons still hold true, you shouldn't sell based on this information alone.
Potential sell signsFirst, let's look at the gross margins trend, which represents the amount of profit a company makes for each $1 in sales, after deducting all costs directly related to that sale. A deteriorating gross margin over time can indicate that competition has forced the company to lower prices, that it can't control costs, or that its whole industry's facing tough times. Here is SUPERVALU's gross margin over the past five years:
Source: Capital IQ, a division of Standard & Poor's.
SUPERVALU has been able to grow its gross margin, which tends to dictate a company's overall profitability. This is great news; however, SUPERVALU investors need to keep an eye on this over the coming quarters. If margins begin to drop, you'll want to know why.
Next, let's explore what other investors think about SUPERVALU. We love the contrarian view here at Fool.com, but we don't mind cheating off of our neighbors every once in a while. For this, we'll examine two metrics: Motley Fool CAPS ratings and short interest. The former tells us how Fool.com's 170,000-strong community of individual analysts rates the stock. The latter shows what proportion of investors are betting that the stock will fall. I'm including other peer companies once again for context.
Company | Short Interest (% of Float) | |
|---|---|---|
| SUPERVALU | *** | 11.7 |
| Kroger | *** | 2.4 |
| Safeway | ** | 8.5 |
| Whole Foods Market | *** | 10.6 |
The Fool community is in the middle of the road on SUPERVALU. We typically like to see our stocks rated at four or five stars. Anything below that is a less-than-bullish indicator. I highly recommend you visit SUPERVALU's stock pitch page to see the verbatim reasons behind the ratings.
Here, short interest is at a high 11.7%. This typically indicates that large institutional investors are betting against the stock.
Now, let's study SUPERVALU's debt situation, with a little help from the debt-to-equity ratio. This metric tells us how much debt the company has taken on, relative to its overall capital structure.
Source: Capital IQ, a division of Standard & Poor's.
SUPERVALU has taken on substantial debt over the past five years. Even with increasing total equity over the same time period, debt-to-equity has increased, as seen in the above chart. Based on the trend alone, that's a bad sign. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry. SUPERVALU is above this level, at 513.5%.
The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If SUPERVALU had to convert its current assets to cash in one year, how many times over could the company cover its current liabilities? As of the latest filing, SUPERVALU has a current ratio of 0.85. This is a bad sign for SUPERVALU. The company's current liabilities are greater than its current assets, which means it could have liquidity issues in the short term.
Finally, it's highly beneficial to determine whether SUPERVALU belongs in your portfolio -- and to know how many similar businesses already occupy your stable of investments. If you haven't already, be sure to put your tickers into Fool.com's free portfolio tracker, My Watchlist. You can get started right away by clicking here to add SUPERVALU.
The recap
SUPERVALU has failed four of the quick tests that would make it a sell. Does it mean you should sell your SUPERVALU shares today solely because of this? Not necessarily, but keep your eye on these trends over the coming quarters.
Remember to add SUPERVALU to My Watchlist to help you keep track of all our coverage of the company on Fool.com.
If you haven't had a chance yet, but sure to read this article detailing how I missed out on more than $100,000 in gains through wrong-headed selling.
=======================================================
Capitulation in SuperValu?
When assessing a difficult-to-value stock for the first time, my initial question is always, "How is the market likely perceiving the equity?" It makes little sense to arrive at a fair value based on a forward P/E multiple when everyone else is looking at a stock based on price / tangible book, for example. SuperValu (SVU) is currently a turnaround story to which sell-side analysts attribute either a P/E or an Enterprise Value / EBITDA haircut relative to the grocer peer group to arrive at a target price.
I haven't been able to figure out how exactly they arrive at the magnitudes of the haircuts, but I suspect their methodologies are qualitative in nature (i.e., SWAGs). They may be right in their approaches, but I don't think so. Furthermore, from a technical perspective, the slide from $12.40 at close of trading on October 18th to an intra-day $8.20 on December 7th appears to have run a capitulation course I've observed in the past (e.g., BP from early May to late July 2010). Absent incremental downside catalysts, the market has fully priced in the company's long road to deleveraging, stabilizing gross profits and optimizing the cost structure.
Though not without pitfalls, calculating the present value of SuperValu's dividends in perpetuity offers a better and more objective approach to assessing fair value. The assumptions I used for a dividend discount model were:
Reducing the ~$75M in annual dividends that are expected over the coming years would neither make a material dent in SuperValu's $7.5B of outstanding debt nor enable needle-moving CapEx for store remodeling and / or build out. Also, the dividend payout ratio, based on pro forma earnings, has been in the 24% to 25% range over the prior five years, this fiscal year excepted. A $75M payout for the next three years is within this range, and unless management wishes to really tank shareholders and its own equity incentives, there is no reason for another reduction.
The cost of equity obviously appeared too low at first blush, but the company's levered beta year-to-date is 1.05. When unlevered, beta went down to 0.30 and resulted in a 2.1% cost of equity if the outstanding debt eventually going to zero was assumed (well, the valuation model does contemplate dividends in perpetuity). More realistically, however, the beta should be somewhere around 0.7, which translates to a target share price of about $7.60, a discount of 13% to Friday's close.
Given a 13% downside and 90% upside, I have become bullish with conviction on SuperValu. As usual, laddering into a long position would be appropriate in case the knife has a bit further to fall.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I haven't been able to figure out how exactly they arrive at the magnitudes of the haircuts, but I suspect their methodologies are qualitative in nature (i.e., SWAGs). They may be right in their approaches, but I don't think so. Furthermore, from a technical perspective, the slide from $12.40 at close of trading on October 18th to an intra-day $8.20 on December 7th appears to have run a capitulation course I've observed in the past (e.g., BP from early May to late July 2010). Absent incremental downside catalysts, the market has fully priced in the company's long road to deleveraging, stabilizing gross profits and optimizing the cost structure.Though not without pitfalls, calculating the present value of SuperValu's dividends in perpetuity offers a better and more objective approach to assessing fair value. The assumptions I used for a dividend discount model were:
- Annual dividend = $0.352
- Dividend growth = 0%
- Cost of equity = 2.1%
Reducing the ~$75M in annual dividends that are expected over the coming years would neither make a material dent in SuperValu's $7.5B of outstanding debt nor enable needle-moving CapEx for store remodeling and / or build out. Also, the dividend payout ratio, based on pro forma earnings, has been in the 24% to 25% range over the prior five years, this fiscal year excepted. A $75M payout for the next three years is within this range, and unless management wishes to really tank shareholders and its own equity incentives, there is no reason for another reduction.
The cost of equity obviously appeared too low at first blush, but the company's levered beta year-to-date is 1.05. When unlevered, beta went down to 0.30 and resulted in a 2.1% cost of equity if the outstanding debt eventually going to zero was assumed (well, the valuation model does contemplate dividends in perpetuity). More realistically, however, the beta should be somewhere around 0.7, which translates to a target share price of about $7.60, a discount of 13% to Friday's close.
Given a 13% downside and 90% upside, I have become bullish with conviction on SuperValu. As usual, laddering into a long position would be appropriate in case the knife has a bit further to fall.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
About the author: Jx Capital
Super value recently put itself up for sale a very bad move indeed. The management of the company is not looking out for the shareholders. The market cap is something like 1 billion dollars the company does 35 billion in annual sales. Why would anyone what to sell a business that does 35 billion annually for just 1 or 2 billion dollars. This is not a comapny in reorganization either. I don't get it.
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