Let's face it: investing in supermarkets isn't very exciting, unless we're talking about King Mackey's hippie heaven, better known to affluent Fools as Whole Foods (Nasdaq: WFMI). The supermarket stocks as a group have been beaten down pretty well this year and for good reason. Price wars broke out in full force last year as the recession caused consumers to cut back on grocery store stops. Some consumers even eschewed grocery stores for the big-box discounters like Wal-Mart (NYSE: WMT), Costco (Nasdaq: COST), and BJ's (NYSE: BJS).
Why so cheap?
The price wars have been extremely costly in the staples category (such as meat and dairy), as stores were unable to pass along the cost to customers as they would have been able to in a better economic environment. This has cut into margins of many chains. While the fundamentals are still not great for the industry, the downturn has created some significant values in the sector. One in particular is Winn-Dixie (NYSE: WINN), which has more than 500 stores in the Southeast.
This isn't the first time Winn-Dixie has looked cheap. The grocery chain emerged from bankruptcy only a few years ago. The company has been unable to compete on price with Wal-Mart, and customers who don't want to shop at Wal-Mart often prefer the newer and better-staffed Publix grocery stores. Pessimism remains heavy among investors and analysts who cover the stock, as they believe Winn-Dixie will have to continue to cut prices to lure customers. This will thin margins in an already low-margin industry, and the company is predicting flat same-store sales as it dukes it out with rivals.
The value is compelling
So fundamentally business doesn't sound so good for the beleaguered grocery store chain, but is the pessimism too great? Shares recently hit a 52-week low of $6.25 and have rebounded a bit in the $7 range. At these prices the stock is too cheap to simply ignore.
The price to book ratio of the company is 0.43. For many companies that don't have valuable hard assets, I don't like to use this metric, but Winn-Dixie does. The real estate, property, vehicles, and products they own are all valuable assets. What's more, the company has more than $2 in net cash per share, which means that about 31% of the market cap is in cash.
Can value trump fundamentals?
Winn-Dixie has certainly had its fair share of struggles, but management seems to be ready to take the necessary steps to increase the company's earnings and potential to other grocery chains as an acquisition target. Winn-Dixie is in the process of remodeling and refurbishing all of its stores, spending nearly $2 million at some stores in order to compete with fresher Publix locations.
In addition, at the end of July the company announced that it would be closing 30 underperforming stores. As a result, it will also lay off about 120 support staff in addition to the employees who are let go due to the store closings. While letting employees go is never something to be excited about, it is important for the company to better manage its costs, and this is a step in the right direction.
With the stock trading at such a favorable valuation, takeover chatter has been constant and is definitely a possibility for grocers looking to enter the region or expand their current footprint. Two such grocers, according to some analysts, are Safeway (NYSE: SWY) and Supervalu (NYSE: SVU).
How do you feel about the grocery store business? The biggest question for investors is a matter of whether value trumps fundamentals. Winn-Dixie has been a pretty cheap stock for a while, and it has continued to get cheaper as it recently traded to new lows. Are you willing to catch a falling knife even if the value is deep? What do you think? Sound off in the comment box below.
