Is SUPERVALU a Good Value Yet?

There are one-hit wonders, and then there are those stocks for which the initial big move is only a preview for even bigger and better gains to come.

For supermarket retailer SUPERVALU (NYSE: SVU  ) , let's call it the beginning of the end. The owner of Albertsons, Sav-a-Lot, Acme, Cub, and other chains is enjoying a 44% jump in value over the past month as private equity realizes the value of its parts may be worth more than the whole, and a bidding war may turn it from scullery maid to belle of the ball.

While its stock may be enjoying a Cinderella story at the moment, midnight is fast approaching.

SUPERVALU snapshot

Market Cap

$585 million

Revenues (TTM)

$35.2 billion

1-Year Stock Return

(64.4%)

Return on Investment

(13.7%)

Estimated 5-Year EPS Growth

(5.7%)

Dividend and Yield

N/A

Recent Price

$2.74

CAPS Rating (out of 5)

***

Source: FinViz.com. TTM = trailing 12 months. N/A = not applicable; SUPERVALU doesn't pay a dividend.

A mighty temblor
While private equity firms like KKR and TPG Capital have expressed interested in various parts of the grocery store retailer, it's been Cerberus Capital Management that's long been in the lead because it wants to buy up the whole thing and merge it with the 650 or so Albertsons it already owns. Cerberus has been trying to arrange financing through JPMorgan Chase and Bank of America  to make the deal work, and SUPERVALU is being patient and giving the P/E firm till the middle of the month to conduct its due diligence. Obviously, that means the deadline is drawing near.

The third-largest supermarket chain behind Kroger (NYSE: KR  ) and Safeway (NYSE: SWY  ) , SUPERVALU has been on a sharp decline, losing billions over the past few years as more nimble competitors, without the drag of the heavy debt load it carries, have expanded sales. And that doesn't include the mass marketers like Wal-Mart  (NYSE: WMT  )  and Target  (NYSE: TGT  ) that have expanded their grocery selections and pressured margins everywhere.

Clean-Up on Aisle 6
According to a study by the CDFI Fund, the supermarket industry is highly fragmented, with the top 10 retailers accounting for just 35% of the total number of stores and 68% of sales. When you add Wal-Mart's impact, you find it has 28% of the market share, distantly followed in second place by Kroger with 11%. Some feel Safeway may even be the next SUPERVALU.

SUPERVALU has lost more than $2.5 billion over the past two years, and trailing losses have widened to $1.2 billion from a meager $27 million profit a year ago. Earlier this year it surprised everyone with better-than-expected results, though I cautioned that as it had lost Target as a major outlet since it was going to self-manage its distribution, investors should shy away from jumping in.

That was just one of the reasons the chain realized that the writing was on the wall and ultimately engaged Goldman Sachs to help sell the company.

Distressing news
Cerberus, because of its relationship with Albertsons, was always a leading contender as a buyer. As an investor in distressed properties, it acquired 655 stores in 2006 when SUPERVALU took over the rest of the chain that included some 1,100 stores under its various brands.

With the end in sight, however, there's little reason for investors to get excited, as it's also always possible Cerberus is able to get the $5 billion in financing it's looking for. Even if it does come through, the upside has likely mostly been figured into its share price, and it's also possible that due diligence will turn up something Cerberus doesn't like. At that point, SUPERVALU will be left trying to sell itself off piecemeal.

I'll pass on making a CAPScall on the grocery store, but share your view in the comments box below on whether SUPERVALU is a super value at these prices.

One of the companies the Fool has highlighted in our special free report "3 Companies Ready to Rule Retail" is a grocer. To find out which one made the cut, just click here to access your free copy.


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Comments from our Foolish Readers

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 November 14, 2012, at 2:43 PM, AnsgarJohn wrote:

    My question is what is the market value of Supervalu's real estate holdings?

    The fact that real estate is marked at cost, could mean it is more than book value. Or as Berkowitz puts it when he says Sears is worth much more than it's market cap: “Generally Accepted Accounting Principles (“GAAP”) mandate valuing their real estate at the lower of cost or market. GAAP would force the Dutch settlers to value Manhattan today at the

    1626 purchase price of $23.70.”

    http://www.fairholmefunds.com/presentations Sears

  • Report this Comment On November 14, 2012, at 3:22 PM, TMFCop wrote:

    AnsgarJohn,

    While real estate can contribute a lot to underlying value, that's only possible if it can be realized.

    As the case of Sears has proven, it hasn't been able to monetize that real estate because a lot of its properties are older buildings in urban settings that apparently a lot of people don't want. They may ultimately get something for the property, but it's apparently not nearly as much as what investors were originally assuming.

    I'm not certain about where SVU has its stores, but RE can be a tricky asset if you can't unlock the value.

    Rich

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