Over the past 3 weeks the general direction of the market has been downward. There has been 1 or 2 huge down days each week that has offset any advances that the market is making. I don’t think the market will crash as it did last fall but it does appear to be drifting lower. I am finally starting to see buying opportunities again. I picked up some shares of Supervalu (SVU) between $12.70 and $13. The grocery chain owns Save-A-Lot, Shoppers, Shop n Save, Acme, Bristol Farm, Farm Fresh, Hornbacher’s, Jewel, Osco, Sav-On, Shaw’s, Bigg’s, Star Markets, Cub,and Lucky. Supervalu owns over 2400 stores nationwide including Albertson’s.
The stock is way down because of a recent profit warning due to heavy promotional advertising and lowered prices to stay competitive with competitors. The negative about the company is the huge 9 billion dollar debt burden that Supervalu took on when the company purchased Albertson’s. Supervalu has been working hard to reduce its debt level and become a more efficient grocery store operator. This is important in the retail grocery business where profit margins are especially thin. At a time when companies are diluting shares, Supervalu is rewarding owners by buying back shares. This is a sign that even management believes the shares are undervalued. Supervalu generates significant free cash flow and expects to pay down over 1 billion dollars in debt over the next few years. The company recently raised it’s dividend and is currently yielding a hefty 5.30%.
I like the grocery store business because it is pretty reliable even during periods of economic contraction. People may trade higher end groceries for lower end ones but they still have to buy groceries.
The 10-year financials I saw at GuruFocus.com [ http://www.gurufocus.com/financials.php?symbol=SVU ] show a $13.48 loss per share in 2008, with a much smaller loss in the most recent quarter too. If it’s turning around, the progress isn’t evident in the financials yet.
Still: the gross and operating ratios tend to improve over time, there’s been dividend growth each year for the last decade, and its average 9-year earnings for 1999-2007 is $1.95. The EPSs for those years have tended to float around that number. Using $1.95 as the earnings gives a “normalized” P/E of 6.5 or so.
The turnaround had better come later this year. From what I’ve seen, it’s customary to keep the dividend up through one bad year…but if a second comes, the divided gets chopped or eliminated. When that happens, the stock almost invariably plummets.
Best of luck with SVU. I have to say, though, that it’s too daring for my copse of the field.
@Daniel M. Ryan
I like that SuperValu has knocked off almost a billion in long term debt. The P/E is very low for the industry. The $13.48 loss was based on the acquisition of Albertson’s and store closures. It wasn’t from ordinary business operations. The company just raised the dividend and generates enough free cash flow to pay the dividend.