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SUPERVALU Inc. Message Board

  • dtejd1997 dtejd1997 Apr 3, 2012 7:31 PM Flag

    Getting close to the knife's edge

    Hey all:

    I've been watching SVU for a while now.

    I am tempted but...

    SVU is nearing the knife's edge. As the stock nears $5/share a lot of mutual funds are going to be forced to sell. At $5/share, the stock is going to be a "penny" stock and no longer eligible for margin accounts. A lot of funds are also prohibited from holding stocks less than $5 in price.

    This will trigger off a self-reinforcing cascade...I think SVU could easily go down another point or so as it goes through a forced liquidation.

    Mind you, this has NOTHING to do with the stock's future business prospects. It is simply a technical matter...

    I think SVU is going to try and hold onto the dividend as long as they can. I think they will only cut it as a last ditch effort to stave off bankruptcy. The dividend will be the last thing to go before bankruptcy.

    Eliminating the dividend will save about $70 million a year. The debt of the company is $7 BILLION. Eliminating the dividend is equal to about 1% of the debt. 1% is not that much in the grand scheme of things. The dividend has already come down tremendously. The share price has also collapsed.

    I would suggest that if SVU can't pay a $70 million a year dividend, then the company is broken...

    SVU also has a problematic pension.

    BUT neither the debt OR the pension being underfunded is an immediate problem for SVU. A year from now (if business does not improve) the debt & pension will be bigger issues.


    It is all going to boil down to wether management can GET AHEAD of the problems. That is, can they cut expenses FASTER than sales & margins are declining.

    Can management start selling assets & paying debt down FASTER than sales & margins are going down?

    If they can, it doesn't matter if SVU is shrinking, Management will build value FASTER than the decline in business...a few years from now SVU will have tripled in price and the dividend will be safe...

    if management can't get ahead of their problems, then SVU is probably going bankrupt.

    At this point I can't quite get a grip of the percentage odds...is it 3:1 or is an even money proposition? Is it possible that it is MORE likely that SVU craters out? I don't know...

    There is a lot of potential here, but it is a tricky proposition...

    Any INTELLIGENT thoughts?

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • I can't see how or where Mgt can stop this impending train wreck.

    • If it doesn't go Bankrupt it will be a $2.00 stock.
      It just does not have a value! Supervalue has no value!

    • One of the more thoughtful recent post that does bring to light a potential problem of the $5 pps holding mandate of many funds and instutions. It is a little technical matter but one that could cause major problems. Not all but, many of the bigger funds have that rule and if it is applied- even by even just a few funds-it could cause a steady pps delcine as they are forced into an orderly liquidation. This is especially true with a stock that is about 96% instutionally owned. In fact, these recent price declines may just be the prelude to what is coming as some funds try to get out before they may be forced to sell.

      I have been in and out of SVU for over two years and feel that mgt is making a strong effort to right the ship by closing stores and cutting cost. It's core earning are still good and cash flow is fine. They have restructured their debt so that major amounts do not start coming due until 2017. On the negative side they must stop the slide in same store sales and see some increase in total volume. I also understand that there are some loan covenants that also may cause problems but, generally lenders often look the other way on these if they are steadly getting paid. At these prices the parts are almost worth more than the whole. This could be the buy of the year. Unfortunately, as you said this is a tricky situtation.

      Cheers,
      bigbear

    • I agree, this guy could be a N-bagger if you play it right and it works out.

      1. Clearly this is a speculative situation, so keep your exposure small (~5% is aggressive) and less than 2% (is probably more appropriate). This is really important regardless of how much "risk" you think you can tolerate because an allocation that is too large may have negative expected geometric return ( E(log(Px/P)) < 0 ) - see the Kelly Criterion.
      2. Purchase shares in increments. So build your position on the way down. Maintain a strict position limit. So if it is 5% of your account now, and goes down 50% then you can buy more such that your position is back to 5%.
      3. Keep in mind that new information is really changing the situation - so if the investment thesis is no longer valid, then stop buying. Consider selling.
      4. Consider buying at the money, long dated call options. These have very little extrinsic because of the dividend. They allow you to risk less and wait till more information is available. I am looking at the 2014 3s and 5s. I for one am not buying the stock for the dividend. Make sure you will be able to have cash in your account to exercise these options to get into the position. You can also, buy-write into a standard long position if you want to get the dividend and don't want to see the extrinsic decay any further. If you choose to buy the options, then you should consider the position to have a value equal to the nominal value of the position rather than the liquidation value. The options should represent risk-managed long positions to you.
      5. If it bounces, make sure that you don't become too exposed to the stock and consider taking some profits to bring your exposure in-line with the risk. Perhaps in 2014, a maximum of 7%-10% nominal exposure or something like that may be responsible if the outlook has improved.

      If 5% isn't enough for you, consider looking at other similar companies such as SWY rather than adding to SVU

    • Big revenue, strong cashflow, and estimates of over $1.00 EPS.

      What debt is coming due that they can't handle?

    • I agree with you that there is no point cutting the dividend. It's not going to make much difference if they cut it.

      SVU has $700 million of free cash flow a year after paying dividends of around $70 million. They can theoretically pay off most of their debt in less than ten years, if they are able to maintain the status quo. The big question is will they be able to.

      They will probably try to use some (half?) of the cash flow to improve their stores once they get over the immediate debt maturities in 2012 and 2013. So clearly they are not completely helpless. Also, the distribution business is worth perhaps $3 a share and can be sold. And they have lots of real estate.

      I consider SVU one of the inflation hedges in my portfolio. If there is a lot of future inflation, SVU wins because its debt diminishes in value while its real estate gains value.

      • 3 Replies to kyrosl
      • You beat me to the punch.. why kind of a company files for Chapter 11 when generating this much EBITDA and FCF? I wish this board had fixed income quotes readily available, so ignoramuses (or is it ignorami?) could see price levels for, say, the $1B of 8% bonds maturing May 2016:

        http://cxa.gtm.idmanagedsolutions.com/finra/BondCenter/BondDetail.aspx?ID=ODY4NTM2QVQw

        For any interested but lazy soul, the bonds trade above par. If the only 'par' you've thus far encountered in your life was when watching Caddyshack, then just accept that this is a good thing. Conservative fixed income investors are willing to pay more than face value for the debt.

        Also, any institutional guy with a risk management mandate disallowing sub-$5 stocks will have cleared out of Dodge long before the price level is breached. You may have even seen this phenomenon play out today, when SVU dropped like a lead balloon... on no news.

        Happy bottom fishing.

      • "SVU has $700 million of free cash flow a year after paying dividends of around $70 million. They can theoretically pay off most of their debt in less than ten years, if they are able to maintain the status quo. The big question is will they be able to. "

        Most of the non specialty grocers have a lot of debt.

        Don't think SVU has to wait until all of its debt is paid off to be considered safe.

        As they pay down debt, their interest expense will decrease, their credit rating will improve and they will have more to spend on capital improvements.

    • "SVU is nearing the knife's edge. As the stock nears $5/share a lot of mutual funds are going to be forced to sell. At $5/share, the stock is going to be a "penny" stock and no longer eligible for margin accounts. A lot of funds are also prohibited from holding stocks less than $5 in price.

      This will trigger off a self-reinforcing cascade...I think SVU could easily go down another point or so as it goes through a forced liquidation."

      I can think of stocks that went below $5 that did not enter a chain reaction of self destruction even under the weight of short coercion.

      Recently GNW for example.

      Nice to have 72+ million SVU shares short.

      I don't see any bankruptcy in next 2 years.

      If SVU drops low enough there is always buyout potential.

      To make things interesting, I recommend that you decide where you stand and either short or go long.

      If you think there is a great chance of SVU dropping to $4 then how could you resist a 20%+ easy short?

      • 1 Reply to jkwelli
      • I am definitely NOT going to go short.

        The easy money has already been made going short.

        If I WERE SHORT, I would be looking to exit my position in an orderly fashion...

        The only people who are short at this point are EITHER:

        A). Slowly moving out of their position

        B). Think SVU is a terminal "ZERO"

        I don't think SVU is a terminal zero, even if it were, I think it would take a long time to get there.

        I don't think SVU is a buyout candidate because they have too much debt and a pension issue.

        I think SVU could easily go down another $.75 or $1.00/share, but I wouldn't risk being short on that. The risk/reward ratio is out of whack.

        I appreciate the thoughtful comments. Most of the comment threads on this board leave something to be desired.

 
SVU
10.00-0.02(-0.20%)Feb 26 4:03 PMEST

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