Bruised Grocery Stock a Super Value

06/06/2011 1:30 pm EST

Focus: STOCKS

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

With Supervalu’s turnaround plan paying off, the valuation and the dividend are too tasty to ignore, writes Taesik Yoon in Forbes Growth Investor.

The last several years have not been kind to Supervalu (SVU), a leading operator of retail grocery stores and the largest publicly traded wholesale grocery distributor in the US.

Strapped with a high level of debt (stemming from its June 2006 acquisition of Albertsons) and increasing competition from Wal-Mart (WMT) and other large-format discount retailers, the company saw its adjusted earnings shrink from a $2.85 per share just two years ago to $1.39 in fiscal 2011, which ended in February.

Yet recent results suggests that the strategic actions the company has implemented over the years to turn its operations around—such as its transition towards a centralized merchandising model, growing private-label brands, remodeling, and shedding under-performing stores—are finally paying off.

This may not seem obvious at first glance. Indeed, net sales in its most recent quarter fell 5.9% year-over-year to $8.66 billion, on lower identical-store sales and store closures.

Adjusted net income, which excludes asset-impairment charges and other one-time items, fell 27.5% to $95 million, or 44 cents per share. However, this exceeded the consensus estimate of 34 cents per share by a wide margin. Management attributed these results to its business transformation initiatives.

Debt levels remain elevated. This is likely why the stock sells at a discount to its more financially sound peers.
While we agree that the company’s balance sheet still needs to improve, we want to note that Supervalu has done a good job of lowering this burden over the past several years.

Total debt fell by $881 million, or 11.6%, to $6.75 billion in fiscal 2011, and is down 26% since the acquisition of Albertsons. The fact that the company continues to pay dividends (currently yielding a generous 3.9% on an annual basis) also suggests SVU is comfortable with its ability to manage current debt levels.

The stock surged 25% in the three weeks following its first-quarter earnings results, but its recent slide has given back those gains. At the current price, SVU trades at just 7 times its fiscal-2012 consensus earnings estimate.

With the company's current turnaround strategy firmly in place, we expect operating results to continue to surprise to the upside.

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