Supervalu (
SVU) has been on our watch list since December 2009. After considerable analysis, I decided to pull the trigger today at $12.81, less than 5% within the 52-week low. My model showed the price of $12 to be the buy range and $15 to be the fair value. The negative earnings on the surface is a concern. However, a deeper investigation shows that the company was forced to take an impairment charge of $3,250 back in January of 2009 because of the Statement of Financial Accounting Standards (SFAS)
No. 142 accounting rule. This resulted in a negative earning of $13.95 per share. The quote below was taken from the
SEC filing.
For the third quarter of fiscal 2009 the Company’s stock price had a significant and sustained decline and book value per share substantially exceeded the stock price. Consistent with SFAS No. 142, the Company performed an interim impairment test of goodwill and indefinite-lived intangible assets at the end of the third quarter of fiscal 2009. Although this analysis has not been completed due to its complexity, based on the work performed to date the Company has recorded a preliminary estimate of impairment charges of $3,250, comprised of $3,000 of goodwill and $250 of indefinite-lived intangibles.
I recalled that SVU was trading at a 70% discount to book during the March low. After an adjustment, it has a book value of $12.79. I purchased the shares at book value.
Despite the consideration of these adjustments, not all is bright for SVU. The company's operating margin is 3.09%, very low compared to its
competitors. A large amount of long-term debt ($8 billion) is a dark cloud that hangs over the company. Large capital expenditure will deplete their cash flow if the economy doesn't pick up. After 35 years of consecutive dividend increases, the company reduced their distribution by 50% and now pays out $0.35 or 2.8% annually. All of these factors contributed to SVU trading at such discounted level.
Forward P/E is at 6.64 times. The price-to-sales ratio is at a low of 0.06. Price-to-book value is at 1. Current dividend yield of 2.8% which exceeds the five year average yield of 2.5%. The current ratio of 1 means that the company can turn over their current assets at the same rate as their current liabilities. This is important for short-term viability concerns.
Fundamental aside, it was the technicals of SVU that prompted me to buy. From the chart below, you can see that for most of 2009 the stock trade within the $17 and $12 range. As business conditions improved and the company returned to profitability in the second half of the year, shares remained unchanged. The stock appears to be "bottoming" as it remains range bound. The moving averages are doing the same as well. A break below $12 would spell trouble and I would get out while a breakout above $17 will signal better times for SVU.
I bought the stock at $12.81 and will sell if it break below $12 (-7%). Profit will be taken around $15 (+17%).
The purpose of our investment observations is to point out quality Dividend Achievers and formers that are near a 52-week low. From this point begins the fundamental research to verify the quality of the stock for both short and long-term investing. These recommendations are within the context of the 3rd year of an 18-year secular bear market. A bear market that we expect could trade in a range between 16,000 and 5,000. The secular bear market will be considered over when the Dow Transports and Dow Industrials exceed their respective peaks on high volume or the dividend yield on the Dow exceeds 6% or higher. -Art
