July 11, 2016

Supervalu’s Strong Cash Flows Make For A Better Near-Cross-Over Credit Profile, While Equity Markets Expect Stable ROA’

SVU PVP 6-23

Moody’s is overstating the credit risk of Supervalu (NYSE:SVU) with its B1 rating. Our fundamental analysis highlights a safer credit profile for SVU whose strong cash flows cover all operating obligations going forward. However, its liquidity profile would only service all obligations including debt maturities until 2018. We therefore rate SVU two notches higher at an HY1 credit rating, or a Ba2 equivalent using Moody’s ratings scale.

Meanwhile, credit markets are grossly overstating SVU’s credit risk with a CDS of 871bps and a cash bond YTW of 11.732%, relative to an intrinsic CDS of 396bps and an intrinsic YTW of 5.032%.

pvp 6-23

SVU is trading at the low end of historical valuations with a V/E’ of 14.1x. The market is expecting a slight Asset’ divestiture of 1% going forward, with ROA’ remaining stable at 7%, in line with consensus estimates. Given the limited growth potential presented by the firm, current equity is fairly valued at best, with little opportunity for upside.

Click here to read the article in its entirety at Seeking Alpha.