Is SUPERVALU a Buffett Stock?

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As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy SUPERVALU (NYS: SVU) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.

Writing in a recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Although the company is probably too small for him to literally buy shares of, does SUPERVALU meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine SUPERVALU's earnings and free cash flow history:

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Sources: S&P Capital IQ and analyst calculations.

SUPERVALU's free cash flow has fluctuated to some degree, though it's managed to remain profitable over the past several years. The earnings shortfalls in 2009, 2011, and 2012 were largely because of large accounting writedowns. One of the big challenges for the company will be to support its top line in the face of an economic downturn and negative same-store-sales growth.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.

SUPERVALU has a negative return on equity due to its negative net income. Over the past five years, it's generated an average free cash flow return on equity of approximately 22%, though it's done so while carrying a sizable debt-to-equity ratio (that's ballooned to nearly 30,000% last year as equity has fallen).

3. Management
CEO Craig Herkert has only been at the job since 2009, though he's spent three decades in the retail industry, largely working for Wal-Mart.

4. Business
Grocery stores aren't particularly susceptible to technological disruption, though it's rare for them to develop the sorts of strong competitive advantages Buffett likes to see in businesses.

The Foolish conclusion
So is SUPERVALU a Buffett stock? Not really. Although the company operates in a straightforward industry and the stock could be cheap if its deleveraging turnaround proves successful, the company doesn't particularly exhibit two of the quintessential characteristics of a Buffett investment: consistent or growing earnings and high returns on equity with limited debt. However, you can stay up to speed on SUPERVALU's progress by simply adding it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

At the time this article was published Ilan Moscovitz owns shares of SUPERVALU. The Motley Fool owns shares of Wal-Mart Stores and SUPERVALU. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Motley Fool newsletter services have recommended buying calls on SUPERVALU. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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