Wednesday, August 24, 2011

The Fool and SVU.

From here:

SUPERVALU (NYSE: SVU ) -- avoid it
Going against the very compelling case fellow Fool Jim Royal made in favor of SUPERVALU last week, I see a drastically different outlook. This is one case where a large short ratio, currently 20% of the float, serves as a stern warning to future shareholders.

SUPERVALU is a work in progress, and for the most part, I prefer to avoid such companies in sectors with razor-thin margins. SUPERVALU's 2012 guidance calls for a 1.5% to 2.5% decline in same-store sales. Also, during its most recent quarter, gross profit dipped from the year-ago period and net cash flows fell to $245 million. Despite a plan to reduce debt, the company still carries $7 billion worth of crippling debt.

Even worse, SUPERVALU was forced to slash its dividend in half when its business turned unprofitable. Though it still yields over 5%, with cash being funneled to pay down debt and a strike looming in Southern California, don't look for that dividend to improve any time soon.


So, with the company having reduced cash flow in the past year, when accounting for debt payments and such (adding them back in), they are still trading at under 3x cash flow... Not exactly what anybody would call expensive.

In addition, it seems that the comments on the short ratio are only comments that care about other people's thoughts on the company, not the author's own (which, arguably, should be all that matter when investing). While I am aware that the company may do poorly and may even have to re-organize (though, I view this as VERY unlikely), I do think that the prospects for the stock are stupendous- especially when comparing operational results to the market cap. After all, this isn't Bank of America (which, may well be hugely undervalued) where we don't know the value of the tangible book... It is pretty cut and dry with SVU. It may have a TB that is negative, but, it is one that is improving significantly...

Disclosure: I own LEAPS of SVU. This is not advice of any kind. This is not a recommendation of any kind. I have received nothing to write/post these notes. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

2 comments:

shlomi ardan said...

Hey Ragnar,

I am also long SVU. I just wanna say that from FCF perspective, the multiple is not x6 - it's 3 or lower - FCF in the last few years is about 500

jeff said...

Thanks for calling that out. I mis-typed the number and have changed it to what is correct.