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Author: madmarv Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5655  
Subject: SVU analysis Date: 2/20/2002 3:24 AM
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TheStamper asked if I could chime in on his SVU thread. I've put together a quick analysis of their financials using my spreadsheet "financials.xls" (www.geocities.com/madmarv00/).

Supervalu                        Units: $Millions except per share data

Qtr. Ending Jun-00 Sep-00 Nov-00 Feb-01 Jun-01 Sep-01 Nov-00 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01
TTM Revenue 23194 23172 22554 21744 15937 16564 16486 16552 17201 17421 20339 23194
TTM Net Income 82 71 66 78 185 43 166 175 231 191 243 82
TTM NOPAT 251 239 230 239 248 78 250 259 277 285 287 251
TTM FCF 302 330 492 520 243 87 280 163 557 384 308 302

Per Share Data
Earnings / Share $0.53 $0.43 $ 0.36 $(0.70) $0.45 $ 0.39 $ 0.44 $1.29 $0.30 $ 1.22 $1.30 $1.82 $1.57 $1.87 $0.62
NOPAT / Share $0.93 $0.74 $ 0.66 $(0.44) $0.84 $ 0.67 $ 0.72 $1.73 $0.55 $ 1.83 $1.93 $2.19 $2.34 $2.21 $1.89
FCF / Share $1.08 $0.52 $(0.90) $ 1.56 $1.30 $ 1.72 $(0.67) $1.69 $0.61 $ 2.05 $1.21 $4.40 $3.15 $2.37 $2.27
TTM Earnings / Share $ 0.62 $0.54 $ 0.49 $ 0.58
TTM NOPAT / Share $ 1.89 $1.80 $ 1.71 $ 1.77
TTM FCF / Share $ 2.27 $2.49 $ 3.66 $ 3.85

Quarterly Growth
Revenue -23.3% 1.6% 1.2% 26.3% -32.0% -2.2%
Receivables 3.0% 5.8% -7.8% -5.7% -11.4% -5.3%
Inventory -3.6% 13.8% -14.2% -5.1% -8.7% 13.0%
Payables -3.1% 2.4% -3.2% -1.3% -13.5% -2.3%
Earnings/Share -18.2% -16.9% -295.2% -164.1% -13.3% 12.5%
NOPAT/Share -20.1% -10.9% -166.4% -290.6% -19.8% 7.0%
FCF/Share -51.8% -272.2% -273.4% -16.6% 32.1% -139.2%

Annual Growth
Revenue -0.3% -11.6% -14.9% 3.9% -0.5% 0.4% 3.9% 1.3% 16.8% 14.0%
Receivables -5.2% -18.4% -26.9% 8.9% -0.7% 6.1% 1.7% 0.0% 36.9% 3.6%
Inventory -10.7% -15.4% -15.9% -0.4% -7.2% 6.0% 2.2% -4.3% 39.6% -9.4%
Payables -5.2% -15.5% -19.3% 13.6% -3.8% -4.3% 0.0% 6.2% 45.7% -2.4%
Earnings/Share -14.8% -9.8% 22.1% -76.5% 301.6% 6.8% 40.1% -14.0% 19.0% -67.0%
NOPAT/Share -9.8% -9.5% 8.6% -68.2% 233.5% 5.4% 13.4% 6.9% -5.5% -14.4%
FCF/Share 20.2% 229.2% -25.1% -64.1% 237.8% -41.0% 263.6% -28.5% -24.9% -4.0%

Profitability
Gross Margin 10.8% 11.1% 10.8% 11.5% 11.1% 12.6% 12.9% 8.9% 9.2% 9.6% 10.1% 10.3% 10.3% 11.0% 11.0%
Operating Margin 2.5% 2.6% 2.3% -1.7% 2.2% 2.7% 3.0% 2.3% 0.7% 2.2% 2.3% 2.4% 2.4% 2.1% 1.5%
NOPAT Margin 1.8% 1.8% 1.6% -1.1% 1.6% 1.9% 2.1% 1.6% 0.5% 1.5% 1.6% 1.6% 1.6% 1.4% 1.1%
Net Margin 1.0% 1.1% 0.9% -1.7% 0.9% 1.1% 1.3% 1.2% 0.3% 1.0% 1.1% 1.3% 1.1% 1.2% 0.4%
OCFM 3.5% 2.5% -0.8% 5.7% 3.1% 5.5% -0.9% 2.7% 2.1% 2.6% 2.0% 2.3% 3.2% 1.7% 2.8%
TTM OCFM 2.8% 2.7% 3.3% 3.4%
Cash King Margin 2.1% 1.3% -2.2% 3.8% 2.5% 4.9% -2.0% 1.5% 0.5% 1.7% 1.0% 3.2% 2.2% 1.5% 1.3%
TTM Cash King Margin 1.3% 1.4% 2.2% 2.4%
ROE 4.4% 3.9% 3.6% 4.2% 14.5% 3.6% 13.7% 13.4% 19.2% 14.7% 13.3% 4.6%
-Net Margin 0.004 0.003 0.003 0.004 0.012 0.003 0.010 0.011 0.013 0.011 0.012 0.004
-Asset Turnover 3.538 3.567 3.539 3.490 3.942 3.847 3.941 3.864 4.203 4.084 3.131 3.620
-Leverage Factor 3.54 3.51 3.44 3.36 3.17 3.61 3.44 3.28 3.41 3.27 3.57 3.57
Incremental ROE 3020.2% -2279.2% 323.0% 172.6% 536.3% 9.4% -52.8% -38.0% 10.0% 575.2%
ROA 1.3% 1.1% 1.0% 1.2% 4.6% 1.0% 4.0% 4.1% 5.6% 4.5% 3.7% 1.3%
Incremental ROA 18.1% 4.2% -8.1% -54.0% -101.2% 8.6% -29.3% -22.8% 2.3% 182.6%
ROIC 8.3% 7.9% 7.7% 8.2% 10.4% 3.2% 10.3% 10.3% 12.1% 12.2% 9.7% 8.5%
-NOPAT Margin 1.1% 1.0% 1.0% 1.1% 1.6% 0.5% 1.5% 1.6% 1.6% 1.6% 1.4% 1.1%
-Operating Asset Turnover 4.86 4.90 4.87 4.82 4.60 4.55 4.61 4.52 5.04 4.93 4.32 4.97
-Operational Leverage Factor 1.57 1.57 1.55 1.54 1.45 1.49 1.47 1.45 1.49 1.51 1.58 1.58
Incremental ROIC 82.2% 20.5% -21.1% -317.3% -1067.4% 10.4% -7.5% 17.9% 0.4% 273.6%
Return on Operating Assets 5.3% 5.0% 5.0% 5.3% 7.2% 2.2% 7.0% 7.1% 8.1% 8.1% 6.1% 5.4%
Incremental ROOA 31.6% 8.5% -7.8% -98.2% -258.0% 10.6% -7.0% 6.9% 0.2% 93.6%
Quality of Earnings 3.52 2.34 -0.88 -3.37 3.67 5.01 -0.71 2.34 7.87 2.53 1.88 1.70 2.93 1.40 7.95
TTM Quality of Earnings 7.95 8.72 11.31 9.63

Financial Strength
Flowie 1.22 1.21 1.30 1.22 1.20 1.21 1.30 1.45 1.38 1.36 1.40 1.43 1.31 1.25 1.22
WCC 5 6 9 6 4 6 9 11 10 9 10 10 8 8 6
DSO 8 10 11 10 7 9 9 8 8 8 9 9 9 10 9
DIO 21 27 30 25 19 26 30 28 27 25 27 26 25 30 24
DPO 21 27 27 26 20 26 26 22 24 24 23 22 23 29 25
CCC 7 10 13 9 6 9 13 14 11 10 13 13 11 11 8
Total Debt to Equity 1.50 1.45 1.48 1.47 1.39 1.28 1.29 1.11 1.44 1.35 1.27 1.33 1.21 1.50 1.47
Cash to Debt 0.07 0.07 0.07 0.07 0.08 0.08 0.07 0.11 0.09 0.07 0.08 0.12 0.11 0.07 0.07
Net Cash -2563 -2524 -2618 -2470 -2336 -2213 -2295 -1269 -1565 -1520 -1519 -1413 -1405 -2540 -2470
OCF Debt Payoff (in years) 3.79 3.75 2.95 3.06 2.93 4.59 3.60 4.62 3.60 2.51 7.45 3.79
FCF Debt Payoff (in years) 8.19 7.08 4.50 4.41 5.23 18.04 5.42 9.32 2.54 3.66 8.25 8.19

SVU's WAAC can be calculated like this (I'm using data as of Feb '01 from the FY01 10-K):

Debt: $2.642 billion
Equity: $1.793 billion

Total capital = 2.642 + 1.793 = $4.435

debt = 59.6%
equity = 40.4%

Cost of Debt:
You should use the weighted average interest rate (i.e. take the sum of the interest rates times the principle divided by the sum of the principle) of all debt currently held. The future interest rates do not matter at this point.
[ (8.7% * 118.5) + (6.7% * 650.4) + (8.6% * 1394.2) ] / (118.5 + 650.4 + 1394.2) = 8.0%

Cost of Equity:
I'm going to use CAPM for this example, even though it is utterly useless IMO (I'll explain why below). See http://www.teachmefinance.com/capm.html for the methodology.

Beta (B) = 0.43 (from MarketGuide)
Risk-free rate (Krf): 4.9% (from 10-year Treasury note)
Market return (Km): 10%
Ks = Krf + B * (Km - Krf)
= 4.9% + .43 * (10% - 4.9%) = 7.1%

WACC = (59.6% * 8.0%) + (40.4% * 7.1%) = 7.6%

Now, this is a really big flaw in CAPM. Equity capital should always be more expensive than debt because equity has a higher degree of risk. As you can see, the cost of equity is below thier cost of debt because of a low Beta which in turn lowers WACC.
If you intend to use EVA, these are roughly the figures you should use if you want to follow the textbook. You can tweak the inputs a bit at your discretion (market return is anyone's guess and I know some people like using the 30-year bond for Krf but I don't view the 30-year as being representative of the market anymore). Personally, I wouldn't use CAPM, I'd take the companies cost of debt and add a few points for safety.

On paper, SVU is marginally value creating, but the margin of error/uncertainty here can swing it either way. Valuation wise, it's a bit hard to call. There's a restructuring charge buried in my Q4/01 EPS which is skewing TTM EPS downward (probably non-recurring, but I still keep the charge in EPS just because it is a real cost). Oddly, SVU's free cash flow is positive and is usually higher than Net Income. This is because SVU regularly sells some of their PP&E which lowers the net Cap Ex. They are also what I would call a slow growth company, meaning they have large depreciation expenses relative to Net Income or Cap Ex. In SVU's case, their depreciation is usually larger than their Net Income and is about equal to Cap Ex. A side effect of this is that the Quality of Earnings (QoE) metric is misleading and should be ignored. The intent of QoE is to judge working capital management and hopefully reveal any financial massaging. Ideally, the company's required working capital should not grow faster than non-cash charges. QoE should be slightly greater than 1, which means the increase in working capital is offset by their non-cash charges leaving the Net Income intact. When QoE goes way above 1 it means the company is collecting a lot more cash that they are reporting in earnings. Sometimes it's too good to be true. That is not to say that SVU is bad or did anything wrong, it just means that QoE is not appropriate for SVU.

Overall, I don't really find SVU attractive at any price. They appear to be overleveraged and has sub-par return on capital. I get the impression that they may have some liquidity crunches when they show < $20 million in cash, ~$500 in receivables and have to juggle $500+ million in ST debt, $1+ billion in payables and almost $2 billion in LT debt.

Marv
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