SVU Analysis

Earlier this week I purchased SVU 2013 LEAPS with a strike price of $15, so I thought I'd follow up with a quick discussion on why I think this could be an attractive opportunity.

1. SVU is very highly leveraged.  As someone who comes from private equity, I'd say I have a healthy appreciation for how leverage can help OR hurt an investment.  For more on the "LBO" nature of SVU, check out this link: http://www.barelkarsan.com/2010/12/supervalu-leveraged-buy-out-for-retail.html
2. SVU is cheap on both an absolute and relative basis.  Granted, it's trading at low multiples because it's highly leveraged (creating increased risk of permanent capital loss) and operationally it's inferior to its peer group.  Read this link for an interesting comparison of SVU and Whole Foods (WFMI), http://seekingalpha.com/article/241435-supervalu-may-soon-have-its-day
3. A new CEO (Craig Herkert) was brought on to turn the company around.  Additionally, he's made it a priority to deleverage the company, nearly tripling the rate of debt repayment from a combination of increasing free cash flow and selling assets.  Here's another link with a general discussion of SVU as well as some more detail on Mr. Herkert, http://seekingalpha.com/article/242200-supervalu-should-reward-patient-investors-with-substantial-upside?source=yahoo

For illustrative purposes I put together a quick and dirty scenario analysis (click to enlarge) with all numbers taken from yahoo finance.  Since the options I purchased expire in 2 years I wanted my analysis to focus what SVU might look like then.

As you can see the key drivers here are debt repayment, EBITDA growth (or in this case shrinkage), and the EV/EBITDA trading multiple.  The next step was to figure out what strike price I wanted on my options, so to figure that out I've put together a simple tool that shows what a $1,000 investment will look like if the stock  is trading at various prices at expiration (click to enlarge).

* Lastly, as a bit of house keeping I've decided to turn off the "Comments" feature on my blog.  The reason for this is I'd like to try corresponding with my readers (I think I'm up to 5) more directly - so, if you have any questions/comments/insights/disagreements (especially disagreements as I always like to hear why I might be wrong) about this or another investment please email me directly at mevsemt@gmail.com.