It’s Finally Time to Buy SUPERVALU INC. (SVU): Wal-Mart Stores, Inc. (WMT), Dollar General Corp. (DG)

As if the traditional hard discount operators were not competition enough, Wal-Mart Stores, Inc. (NYSE:WMT) is rolling out its own dollar store format. The company’s current plans call for 700 to 800 Neighborhood Market stores. Considering Wal-Mart Stores, Inc. (NYSE:WMT)’s enormous free cash flow engine, investors can count on Wal-Mart Stores, Inc. (NYSE:WMT) spending a lot of money on this concept — whether it shows initial promise or not. This will make things tough for Save-A-Lot.

Valuation

However, if Save-A-Lot is able to meet management’s expectations, then the stock is wildly undervalued. The company’s market capitalization is about $435 million. After accounting for the Cerberus transactions and adding in pension liabilities, the total enterprise value comes out to $5 billion — or 6.6x 2013 EBITDA.

If the company were to trade at a more normal EV/EBITDA multiple — say 8x — the equity would be worth $1.435 billion, or more than 3x the current market capitalization.

Final Thoughts

Although the Cerberus transaction offloads a lot of debt, SUPERVALU INC. (NYSE:SVU) is still highly levered. This leverage is why only a small re-pricing of the enterprise has such a drastic effect on the value of the equity. This is a source of major upside potential, but it is also a source of downside.

Supervalu is doing the right things to get its business going again. If management can hit its targets, then Supervalu can easily triple from here. But always be aware of the downside.

The article It’s Finally Time to Buy This Retailer originally appeared on Fool.com and is written by Ted Cooper.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.