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Is It Time to Back Up the Truck on SUPERVALU?

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So what exactly has changed since my last purchase of SUPERVALU (NYSE: SVU  ) for my Special Situations portfolio in late January? Well, the stock is nearly 30% cheaper, and it's paid off nearly $360 million in debt. Make any sense? Not to me. That's why I'm back to buy more of the shares for my portfolio and to tell you exactly why I'm doing it.

As before, the special situation at SUPERVALU remains the deleveraging. The company has nearly $5.2 billion in debt, but it's committed to paying off as much as $450 million more this year, and free cash flow for the next few years should comfortably cover maturities. You can see the debt market's comfort with SUPERVALU 's situation in bonds that trade near or above par. Even the 2016 maturity of $1 billion, which the company will not be able to pay off before it's due, trades above par. So why is the stock market all roiled?

And you want cheap? In its fourth-quarter conference call, the company predicted earnings per share of $1.27 to $1.42 for the upcoming year. The 18 analysts covering the stock came in at the low end, $1.29. That's less than four times earnings. Meanwhile, peers Kroger (NYSE: KR  ) and Safeway (NYSE: SWY  ) trade at 9.5 and nine times forward earnings, respectively. And Whole Foods (Nasdaq: WFM  ) -- admittedly something of a different beast given its focus on higher-end consumers and products -- trades at 39 times.

SUPERVALU even looks to grow earnings, from an adjusted EPS of $1.25 in the past year to at least a few cents more this year. It's small, but I'll take it. And CEO Craig Herkert predicts an improvement in same-store sales to negative 1%-2%. And we still have another growth engine in the Save-A-Lot franchise.

Also nice is that Herkert expects margins to hold firm, as SUPERVALU funds lower prices with its other cost-saving initiatives. SUPERVALU's operating margin is about in line with Safeway's at 2.6% and somewhat higher than Kroger's at 2.5%.

Some speculation of a private equity buyout has taken shares off the recent bottom of about $4 per share. That may or may not happen. But I'm refusing to anchor to price here. At $5, shares are still a great deal. That's why my Special Situations portfolio will be buying $1,000 on the next business day.

Interested in SUPERVALU or think I'm nuts to buy it? Let me know (or let me have it) on my discussion board and follow me on Twitter (@TMFRoyal).

Jim Royal, Ph.D., owns shares of SUPERVALU. The Motley Fool owns shares of SUPERVALU and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Whole Foods Market and buying calls on SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (11)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 11, 2012, at 8:01 PM, djlresearch wrote:

    You the man!!! Good luck with this pick. Make sure you let us know how much money you made.

  • Report this Comment On July 12, 2012, at 1:54 AM, ChrisWalczakSD wrote:

    Did it make you feel better to post that? Like you've never made a bad pick.

  • Report this Comment On July 12, 2012, at 7:20 AM, tenseventyfive wrote:

    Holy cats - SVU is down 28% in premarket to 3.83 - with no due respect, I hope you left some room in that truck you backed up for your belongings, because you may have just lost your house...

    situations like this are exactly why you should NEVER listen to anyone else's ideas/advice, and do the homework for yourself.

    Godspeed, Dr. Royal.

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Related Tickers

10/26/2016 4:01 PM
SVU $4.34 Down -0.13 -2.91%
SuperValu CAPS Rating: **
KR $30.90 Down -0.01 -0.03%
Kroger CAPS Rating: ****
SWY.DL $0.00 Down +0.00 +0.00%
Safeway CAPS Rating: **
WFM $28.43 Down -0.16 -0.56%
Whole Foods Market CAPS Rating: ****