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Strategies & Market Trends : Value Investing

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To: Madharry who wrote (41113)	1/20/2011 10:11:12 PM
From: E_K_S	2 Recommendations Read Replies (3) of 78515

Re: SVU - One way to value their Supply Chain Business According to the Forbes article I posted, SVU derived 22.2% of their fiscal 2009 sales from their supply chain service business. If you look at their annual report for 2010 their supply chain sales were also running about 22% of their sales. In 2010, their supply chain services earned $299 million or about $1.41/share. My back of the envelope valuation calculation is based on analysts next years earnings estimates of $1.20/share. 22% of this number s/b attributable to their Supply Chain Business or $0.27/share. At a 20 PE (industry is 23X look at FDX & UPS) you get $5.40/share. This division s/b a higher margin business than the general grocery category and should demand a higher PE.. Realistically, you can not separate the Supply Chain segment from the Grocery segment w/o allocating a large portion of the company's debt back to this division. To run as separate companies, the grocery division should have little or no long term debt. What about spinning off their Supply Chain Business and use the proceeds to pay off their long term debt. Shareholders receive shares of the new SVU (w/o debit) and the new Supply Chain Business (post payment of $4 Billion LT debt). If you value their Supply Chain Business at 18x earnings at $1.41 (2010 Supply Chain earnings per share) that equals $25.38/share (Market Valuation of $5.5 Billion). Now subtract out the company LT debt of $20.00/share ($4.0 Billion), you come up with a net value of $5.38/share ($1.5 Billion). With no debt, the grocery business could earn $0.75/share - $1.00/share and could be valued at 10x earnings or $7.50/share - $10.00/share (Market Cap $1.6B-$2.21). New Supply Chain Business - Market Cap $ 1.5B New SVU (w/o debt) - Market Cap $2.0B The combined parts would be worth $12.88/share-$15.38/share. The key point from this review is that their Supply Chain Business is their crown jewel and the main revenue generator for the company. By spinning off the division, you could generate enough money to pay off all their debt and be left with two very profitable operating companies with a valuation of the combined parts 100% higher than the current market price. In summary SVU should probably continue to operate all their stores (making periodic sales/closures based on store profitability), pay down debt and build their Supply Chain Business services. They could however, spin off their Supply Chain Division, pay off all company debt and end up with two profitable operating companies. I would like them to integrate one or more private label brands into their supply chain offerings. This could provide a good growth kicker to this profitable division. EKS

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