Rising Star Buy: SUPERVALU

This article is part of ourRising Star Portfoliosseries.

About a half-year ago, my Special Situations portfolio dove into shares of SUPERVALU (NYS: SVU) , a beaten-down supermarket operator with a ton of debt. The special situation was the deleveraging being undertaken at the company. (You can see the original buy thesis here.) Now with shares even cheaper, I'm back to buy more.

The market really didn't take kindly to SUPERVALU's most recent earnings report. The company reported adjusted earnings per share of $0.24 for its latest quarter, and same-store sales of -2.9%. And because of its low share price, the company was forced to take a writedown on goodwill of $800 million. On the bright side, its Save-A-Lot unit continues to do well, with comps up nearly 4% in the quarter.

Now there's nothing great about negatives comps, but SUPERVALU is still working on its turnaround and implementing strategies that drive long-term sustainable traffic to its stores rather than coupon clippers who buy only the great deals and nothing else. You see that in gross margins that actually improved year over year. And the goodwill writedown reflects the bad investments of prior management rather than the crew at the helm now.

For the full year, the company is still projecting adjusted earnings of $1.20 to $1.30 per share, or about 5.5 to six times earnings. That's a ridonkulously low multiple for a going concern.

And the business continues to deleverage, reducing outstanding debt by $350 million (fiscal) year to date on its way to $525 million to $550 million in debt reduction for the year. It's already prepaid more than half of a $250 million loan due in June, and maturities due in the following fiscal year total $480 million -- well within the company's ability to pay with its operating cash flow. And less debt means more profit.

SUPERVALU has upped the capital expenditures about $100 million from fiscal 2011, to $700 million to $725 million this year, and my preference would be a faster pay down of debt rather than deploying new stores.

Supermarket retail is a tough environment with slim margins in even good times. But SUPERVALU is doing reasonably even relative to peers. For example, Kroger (NYS: KR) is a good operator, and it manages an operating margin of just 2.6%. Safeway (NYS: SWY) gets 2.9%. And in between is SUPERVALU at 2.7%. But look at their earnings multiples: Safeway and Kroger trade at 15.3 and 12.6 times earnings. Again, that compares to less than six for SUPERVALU. Plus SUPERVALU pays out a tasty 5% dividend.

So my Special Situations portfolio will be investing $1,000 into SUPERVALU on the next trading day.

Interested in SUPERVALU or have another stock to share? Join me on my discussion board and follow me on Twitter (@TMFRoyal).

This article is part of ourRising Star Portfoliosseries, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of ourRising Star analysts(and their portfolios)here.

At the time thisarticle was published Jim Royal, Ph.D., owns shares of SUPERVALU. The Motley Fool owns shares of SUPERVALU. Motley Fool newsletter services have recommended buying calls on SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.