SUPERVALU INC. (SVU): Is What’s Left Worth Owning?

While it’s true that the new debt cost appears cheaper, this isn’t the windfall investors might first expect. The $1.5 billion term loan is priced at 5.75 percentage points more than LIBOR, and the line is priced at 2% more than LIBOR. Even if the deal saves 20% on Supervalu’s interest costs, quarterly interest may still be over $100 million. Save-A-Lot and the Independent division generated about $87 million in earnings last quarter. What part of $87 million minus $100 million makes you want to buy the stock?

Won’t The New Company Have Better Margins?
Save-A-Lot’s operating margin was 3.8% last quarter, and the Independent division reported an operating margin of 2.5%. The combined operating margin should be about 2.9%. While this compares favorably to Kroger at 2.73% or Costco at 2.69%, the company isn’t in the same league as Wal-Mart at 5.37% or Target at 6.88%. The other problem is, both of these divisions have seen severe margin erosion in the last year. With Wal-Mart and Target offering a broader lineup of goods, and Kroger and Costco competing on price, there isn’t a lot of room left for Supervalu.

What Should Investors Do?
Given the alternatives, I don’t see a reason to stick around and see what happens. Whether you choose Kroger, Wal-Mart, or Target, all of these companies offer yields of over 2% with projected growth rates of at least 9.2%. Costco pays a 1% yield, but is expected to grow faster at over 12.6% in the next few years. By comparison, Supervalu is projected to show negative EPS growth. Given the company’s heavy reliance on traditional and discount grocery operations, it’s likely that stronger competitors like Wal-Mart and Target will continue to take market share. What these two giants don’t take, Costco or Kroger will step in to retrieve. The traditional grocery store business is in trouble, and Supervalu is in worse shape than its competition. The deal with Cerberus helped the stock in the short-term, but longer term, there doesn’t appear to be anything worth owning.

The article Is What’s Left Worth Owning? originally appeared on Fool.com and is written by Chad Henage.

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