This Grocer Presents a Super Value Opportunity

Posted: May 22, 2012 at 2:16 pm

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By Tom Gibbs - May 21, 2012 | Tickers: COST, SWY, SVU, KR, WMT | 0 Comments

Tom is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

The grocery industry is abuzz thus far in 2012 as discretionary consumer spending has continued to increase and many shoppers begin to emerge from the emergency saving habits that have developed over the past several-year recessionary period. Many of the sectors primary players -- including Kroger (NYSE: KR), Safeway (NYSE: SWY), Wal-Mart (NYSE: WMT), and Costco (NASDAQ: COST) -- have enjoyed increasing top lines from mid-recession trough levels as a result of consumers spending more per shopping visit on more discretionary and higher-margin items like pre-made foods and wines/spirits.

The same cannot be said about Supervalu (NYSE: SVU), which has experienced a near 20% revenue decline and has lost 90% of its stock value over the past five years. On the surface, the grocer appears to be an entity that most would not touch with other investors' money short interest represents more than 40% of the float, the corporation has an extremely unattractive debt and pension obligation balance, and performance metrics (on square footage basis) continue to falter while competitors continue to enjoy year-over-year improvements.

Despite the poor performance over the past several years and the huge strides Supervalu must take to restore confidence in its brand, the gross beating that the stock has taken since recent 2007 highs has created a unique value-focused opportunity for patient, long-term oriented investors. The recent upgrade from Longbow Research from neutral to buy with a price target of $8 (64% appreciation from todays price) suggests that others believe that the wheels are already in motion for a turnaround.

Why is Supervalu a buy at current market valuations?

A Plan is Outlined

An investment in Supervalu is not based on hopes that the grocer can boost its top line and operating margins to average peer levels. Due to the pessimism surrounding the stock and the weak outlook expectations (as the short interest implies), Supervalu simply needs to show some improvement to begin driving stock price appreciation.

The corporation has, most importantly, identified one of the primary turnaround points for operations and has outlined a reasonable plan to begin experiencing improvement. In order to re-build consumer loyalty and drive store traffic toward historic levels (comparable store sales have declined for the past 15 consecutive quarters), Supervalu is using these approaches:

Cash Flow Positive

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This Grocer Presents a Super Value Opportunity

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May 22nd, 2012 at 2:16 pm