Supervalu Inc. (SVU): Is This Speculative Grocery Company A “Super Value”?

Threats and Alternatives

One of the main reasons for Supervalu’s decline is their inability to compete with large discount retailers such as Wal-Mart Stores, Inc. (NYSE:WMT), which has grown into the number one grocery business in the U.S. Wal-Mart has been the direct cause of some of SUPERVALU INC. (NYSE:SVU)’s stores underperforming.

Wal-Mart Stores, Inc. (NYSE:WMT) is a viable alternative to investing in a pure grocery play because it gives investors exposure to virtually every aspect of the retail sector. In addition, Wal-Mart is a stock that works in both good times and bad, due to its low prices and one-stop shop business model. Wal-Mart Stores, Inc. (NYSE:WMT) trades at a very reasonable valuation of 14.8 times TTM earnings, and pays a 2.5% dividend yield, which it has raised consistently over its history.

If you insist on a pure grocery play, a company like The Kroger Co. (NYSE:KR) may be the way to go. Kroger trades at an even lower valuation of just 12.5 times earnings, and the consensus calls for a 10% forward growth rate. While The Kroger Co. (NYSE:KR) is not able to fully price-match with Wal-Mart Stores, Inc. (NYSE:WMT), the company’s strategy has been to create such a good shopping experience for their customers that they simply don’t care about paying a little more. This strategy seems to be very effective, as The Kroger Co. (NYSE:KR) has grown its revenues every year over the past decade, including the economic crisis years of 2008-09. How many other companies can make that claim?

Valuation

It is tricky to analyze the value of a company with operating losses and declining earnings like Supervalu. At the same time of their recent sale of some of their stores, an investment group purchased 21.2% of SUPERVALU INC. (NYSE:SVU)’s outstanding shares for $4.00 per share through a new issuance by the company. Bear in mind, this was just a few months ago, and shares are 58% above that price level right now.

Buy, Sell, or Hold?

While Supervalu is projected to earn a small profit for the current fiscal year (2014) of 32 cents per share, I’m still hesitant to jump in until the company’s turnaround efforts begin to show real signs of working. As things stand right now, I really don’t see any reason for shares to be up by more than 50% over the past few months, and would need to see a pullback closer to the $4 range before taking a chance on this very speculative company.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of SUPERVALU INC. (NYSE:SVU).

The article Is This Speculative Grocery Company A “Super Value”? originally appeared on Fool.com.

Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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