From Cabot Wealth Advisory 3/13/08 Sign up for free Cabot Wealth Advisory e-newsletter
SUPERVALU (SVU) was founded in 1871 and is a leading U.S. food wholesaler and grocery store retailer with 2,500 stores throughout the country.
Growth of sales and earnings was slow earlier in the decade, but in June 2006, the company acquired 1,124 stores from Albertsons for $12.4 billion. SVU’s purchase of Albertsons stores was obviously a major undertaking that has doubled SVU’s revenues and increased the bottom line significantly. Cost savings from the acquisition will continue during the next three years and will help earnings pick up even more steam. Sales should also pick up because of Albertsons higher same-store sales.
I forecast a 12% EPS increase during the next 12-month period, compared with SVU’s average 6.2% growth during the last 10 years. Closing underperforming stores will boost same-store sales growth and profitability. While the balance sheet contains excessive debt, the company’s high cash flow will enable SVU to pay down total debt quickly.
Back in early January, SVU lowered its EPS forecast by a very small amount, but in reaction the stock price dropped dramatically, hitting a low at 26 before stabilizing at 28.
Now is the time to pounce. SVU shares are clearly undervalued at a mere nine times trailing earnings and at only 0.84 times book value. I believe SVU’s shares will advance to $44.33 within one to two years.
Very few quality companies sell at less than book value, even in today’s beaten-down market. In the current economic turmoil, a recession-proof investment is certainly worth a look. I strongly recommend buying SVU at its current price.
J. Royden Ward
Editor of Cabot Benjamin Graham Value Letter
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the Value Letter.