BOSTON (TheStreet) -- SuperValu (SVU), the fifth worst-performing S&P 500 stock of 2010, may be due for a rebound in 2011. It ranks as one of the cheapest companies in the benchmark index, and at least one reputable research firm says its stock may double.


SuperValu's business crumbled during the recession as consumers traded down to Wal-Mart ( WMT) and other discount stores. SuperValu's bargain chain, Save-A-Lot, benefited from the trend, but not enough to compensate for rapidly declining same-store sales at its traditional grocery brands, which include Albertsons, Shaw's, Acme and Star Market.

In what could be considered a bi-modal recovery, many Americans, daunted by unemployment and declining home prices, are remaining in survival mode, deleveraging, saving and cutting household costs. On the other hand, those who traded down to traditional grocery stores from high-end organic outlets have returned to the likes of Whole Foods ( WFMI).

Adding insult to injury, SuperValu's supply-chain services business, which helps mom 'n' pop shops, i.e. independent grocers and retailers, is in decline. According to Morningstar, the grocery-distribution business is expected to decline between 2% and 4% a year in the foreseeable future. Grocery distribution accounts for 20% of SuperValu's annual revenue.

There are even more reasons to be skeptical of SuperValu, namely, it decided to purchase Albertsons, a traditional grocery chain in 2006, along with investors from Cerberus and CVS. This was a terrible transaction as the trend for premium (read: Whole Foods) and discount (read: Wal-Mart) was clearly established. Middle-ground food purveyors were getting crushed.

An acquisition was followed by a crippling recession. SuperValu, more leveraged than its peers and suffering from integration costs, was caught off guard. Its stock has delivered annualized losses of 40% since 2007. Enter 2011, a year in which the turnaround gains traction.

Although no sell-side analysts recommend purchasing SuperValu's stock, nearly all believe it's grossly undervalued. Of those covering the company, 12 rate it "hold" and two rank it "sell." However, a median target of $11 suggests that SuperValu currently trades at a 27% discount to fair value. BMO Capital Markets and Credit Suisse value the stock at $13, suggesting it could rise 50%. JPMorgan is less optimistic, auguring a share price of $10.

There's no denying that SuperValu is a beleaguered company. And chief among its problems is leverage. It carried $203 million of cash and $7.1 billion of debt on its balance sheet at fiscal second-quarter's end, translating to an excessive debt-to-equity ratio of 4.9. But, management is addressing the problem. Total debt decreased 13% from the year earlier tally. SuperValu's margins are thin, with a gross spread of 25% and an operating spread of 2.5%.

Still, the company generates a sizable amount of cash, and groceries are unlikely to go out of style anytime soon. SuperValu is selling non-core assets to pay down debt. It unloaded Bristol Farms in November and, just this week, announced that it would sell Total Logistic Control to Ryder System. The deal terms haven't yet been disclosed to investors.

Morningstar believes SuperValu has no "economic moat", its perception of sustainable competitive advantages, and a high degree of fair-value uncertainty. Nevertheless, it sees a compelling risk-reward proposition in the shares. Morningstar covers roughly 1,700 stocks and awards a five-star rating to just 29, one of which is good ol' SuperValu, the nationwide grocery chain that could. Its stock trades at a forward earnings multiple of 5.7, a book value multiple of 1.3, a sales multiple of 0.1 and a cash flow multiple of 1.3, sizable discounts to food and staples retailing averages. SuperValu pays a quarterly dividend of 9 cents, translating to an annual yield of 4%. It halved the dividend from 18 cents in 2009.

Morningstar's fair-value estimate, equivalent to 13 times forward earnings, an enterprise value/EBITDA ratio of 6.4 and a free cash flow yield of 6.4%, is $20. It cut the estimate from $25 on Oct. 21. The $20 target suggests that SuperValu's stock may more than double. The short-sighted sell-side is contradicted by institutional investors who see long-term return potential in SuperValu. Of the stock's 68 largest shareholders, 36, or 53%, increased their stakes during the third quarter, seven, or 10%, held steady and 25, or 37%, lessened holdings.

-- Written by Jake Lynch in Boston.


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