Last year, Supervalu (NYSE:SVU) suffered a tremendous beat-down on the stock market. The stock price of this food retailer fell down from $ 45 to $ 10.
A 75% stock decline for such a company is very unusual. Historically, Food retailers are known for their stability and consistently. This is no different with SVU. Recent years show that the turnover of this company was remarkable consistent and hovered around $ 40 billion. This is no real surprise because food is a consumer good that doesn’t suffer from large demand shifts. Besides, SVU has a large distribution network with low-cost/low-priced retail shops.
So the question remains: What did cause the remarkable decline?
The ugly shell of SVU
Let’s take a look at the income statement to see what’s going on:
A quick glance at the income statement shows that SVU suffered a loss of $ 2.9 and $ 1.5 billion in 2009 and 2011. To make things worse: the balance sheet of SVU shows that long-term debt was $ 6.3 billion at the end of 2010. Moreover, many news reports argue that SVU suffers a lot from competitive pressures of discounters like Wal-Mart/Amazon. Investors are worried that Supervalu has difficulties repaying its debt.
Naturally, this is reason for concern. Reasons for concern are always bad for a stock price. It scares away many investors.
But one have to ask itself: Are the reactions of investors heavily exaggerated? Is the 75% decline of SVU justified?
The beauty inside
One have to ask this since SVU is extremely cheap if you take a close look at the ratio’s. For instance, the forward P / E ratio is 8 and the P / S ratio is even 0.06. Yet, the real hidden value of SVU becomes apparent if we take a closer look at the cash flows of Supervalu.
The income statement might look really bad. However, if we take a closer look at the cash flow statement we see that SVU only suffered a loss because of large write-down of goodwill. The write-down was caused by an overpriced acquisition back in 2006 when the former chairman bought a competing food retailer for $ 17 billion (note: the current market value of SVU is 2.2 billion dollars). Sales and turnover doubled because of the acquisition. Unfortunately the acquisition was too expensive which made SVU accelerate the amortization of goodwill.
Nevertheless, the cash flow statements shows that we are left with a very nice free cash flow (with or without the accelerated amortization). These cash flows are many times higher than the “accounting profit”:
The above table shows that SVU generated a free cash flow of $ 2.5 billion in the past 3 years ( $ 833 for each year). (Supervalue used this cash to repay its debt, so the actual Free Cashflow looks different). If the growth rate in free cash flow is set to 0% and we discount a cash flow of $ 833 million with 12% (!) (which is very conservative), we arrive at a market capitalization of $ 6.9 billion. This is significantly higher than the current market value of $ 2.2 billion.
Assets and Liabilities
Of course SVU has debt of $ 6.3 billion on the balance sheet which we have to account for.
However assets (book value) are currently valued $ 1.2 billion higher than liabilities. The execution value of all assets may even be much higher. The purchase price of all real estate of Supervalu is $ 4 to 5 billion, while the book value is only $ 3 to 4 billion. Even if we completely write-off all inventory ($ 2 million) we are left with a asset surplus.
I wouldn’t be surprised if the current execution value of SVU exceeds the value of all liabilities. However even if we assume that execution value equals $ 0, we are still left with a value of all cash flows which equal 6.9 billion ($ 32.50 per share). The current share price is $ 10.66. (Margin of Safety of more than 66%). In conclusion I can say that Supervalu looks cheap, way to cheap as of this moment.