SUPERVALU Could Be Headed for the Top Shelf

Supermarket chain SUPERVALU (NYSE: SVU  ) bucked the downward trend today, jumping more than 15%, after providing promising guidance for the coming year. With a forward P/E around 5 and a painful restructuring potential in the rear view, I've decided to give the grocer a positive CAPScall, as I'll explain in more detail later. First, let's go over a few details from the earnings report.

The parent of Acme and Albertson's posted a $424 million loss, but when non-recurring charges for intangible asset impairment and employee layoffs are backed out, it turned a profit of $81 million, or $0.38 per share. That still represents a drop from its earnings a year ago of $95 million, however. For the year, non-GAAP EPS came in at $1.25, but because of restructuring, GAAP EPS was -$4.91.

The real treat for investors came in the company's fiscal 2013 guidance, as it's projecting GAAP EPS of $1.27 to $1.42. With shares trading just over $6, that puts its forward P/E at an incredibly low ratio of just over 5. P/Es that low are usually reserved for companies that have no hope. The company may be projecting a same-store-sales drop of 1% to 2% for the coming year, but unlike BlackBerrys, supermarkets are clearly here to stay. Compared with other brick-and-mortar retailers such as those selling electronics, books, or hardware, supermarkets are much more insulated from the online threat posed by Amazon.com and others, because they sell perishables and their products serve an urgent need.

With its restructuring plan partially behind it, the company appears to have hit bottom and is ready to resurface. It could also benefit from a potential decrease in the corporate tax, and continues to generate enough free cash flow -- nearly $400 million in the past year -- to support a generous dividend yield of 6%.

SUPERVALU's gross margin of 22% puts it ahead of rival's Kroger's (NYSE: KR  ) 20.8%, and at a better value, as Kroger trades at a forward P/E of 9. Considering fellow grocer Safeway (NYSE: SWY  ) is also valued at forward P/E of just 9, it looks as if the whole supermarket sector is undervalued, as the broad market generally trades at a trailing P/E of 12. Still, SUPERVALU is by far the most underpriced stock to be found in this sector. While these companies may not be the shining star that Whole Foods (NYSE: WFM  ) is, they face no imminent threats, serve a necessary need, and have plenty of upside potential to emerging-industry trends such as the move to organics and prepared foods.

For these reasons, I've recently made a bullish CAPScall on SUPERVALU. It's hard to argue with a 6% dividend yield, and at the ridiculously low value it's going for now, it's hard to see it going much lower, especially considering the necessity of the service it provides. I also like the additional revenue that the 250 Save-A-Lot stores it plans to open will bring in. If it follows through on its guidance over the next year or two, there's no reason its share price shouldn't double.

Another retailer I'm excited about is an upstart in Latin America that offers an excellent value for its growth opportunities. The company is using a Costco-like business model, which gives it a first-mover advantage in this emerging market. The Fool is so bullish on this company that our chief investment officer even named it his "Top Stock for 2012." Get the name of this hot prospect and find out why it could be a multibagger for you in our special free report. Get your copy.

Fool contributor Jeremy Bowman holds no positions in the companies in this article. The Motley Fool owns shares of Costco Wholesale and SUPERVALU. Motley Fool newsletter services have recommended buying shares of Amazon.com, Whole Foods Market, and Costco Wholesale and buying calls on SUPERVALU. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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