As they say nothing is recession-proof then what are the stocks which are recession-proof?
Experts believe that there are a few businesses that are less prone to a recession than others. Some of these businesses might not experience sales drop or report some decline in sales, while some others might even be able to maintain their earnings, including grocery retail, fast moving consumer goods, entertainment and media, and pharma.
We have dug up one such stock from the above mentioned sectors and it is extremely cheap in terms of its intrinsic value market. Most importantly, the stock gives you a large dividend yield of 4 percent. The company has reported an increase in sales in its most recent quarterly data even though the earnings have taken a hit. Going forward we should expect the stock to maintain its earnings, or if credit market tightens it may see a slight dip. The earnings could drop too, but the company should be able to maintain the dividend payout even in tough times.
The long-term earning power of the business remains intact. However, the current heavy volatility, economic downturn and a drop in the stock’s overall net value compared to a year ago period have made the stock available at very cheap prices. So not only the grocery retail sector is trading below its intrinsic value but within those SuperValu Inc. (NYSE: SVU) is relatively the cheapest stock available.
Considering the stock’s PE ratio, the company has been trading at a ratio of around 6. While others -- including Safeway, Kroger and Whole Foods under S&P500 index -- are trading at PE ratios above 10. However, keep in mind that SVU has a much larger debt, thanks to the Albertson’s acquisition, as compared to the others. So instead of taking the PE ratio we define a new ratio the Enterprise PE (EPE) ratio. For this we take the debt per share and add it to the price per share and divide the sum by the EPS. This equates the method of financing being debt or equity and makes differently leveraged companies comparable. On this parameter SVU seems valued at an EPE of 21, which is approximately same as others.
In addition, there is an interest cost hidden in the EPS of SVU, which is higher than others. Over the next few years, once financing is available at lower costs (given the trillions of dollars of government or taxpayer money being pumped into the system), their interest costs will start going down and EPS will grow faster than sales. A higher EPS will be revealed as the debt is paid off and even if the pe ratio is kept on par with other retailers, the stock price will be higher. But given its accelerating eps growth, it will get a higher PE on a higher EPS and the stock price should accelerate, which is expected to be noticed over the next few years.
At that time the earnings unfettered by debt should be about $4 per share and a reasonable pe of 15 should give a stock price of $60, which is approx. 3.5 to 4 times today’s prices. Even if this happens over a 5 year time frame, the stock is likely to generate nearly 25-30 percent in returns on annual basis. Meanwhile, you receive dividends most likely at the rate of 4 percent per annum.
We will look at a few other valuation ratios just to validate our thesis. The Enterprise Value to EBITDA ratio is 4.7, which is lower than ratios ranging from 5.1 to 6.3 for the peer companies. EV/Revenue is 0.29, which compares favorably to 0.32 to 0.38 for peers. Dividend yields for peers are 0 to 1.4%. Price to book value is 0.6 as compared to 1.4 to 3.2 for peers. And considering all above valuation parameters, the SVU stock is much lower priced as compared to other comparable grocery stocks.
Synergies from the Albertson’s acquisition and belt tightening during recessions should result in better margins once the downturn in the economy is over. Further, sales should be better given the store remodeling expenses, which they already have incurred recently. However, there are huge margins of safety even from real estate ownership of the stores. SVU owns more stores than other grocers who typically lease them. That is another hidden appreciation potential, albeit, over the long run.
Again, keep in mind to take small bites and complete your acquisition over next several weeks or months to take advantage of further falling stock prices. Purchasing in this manner may expose you to some price increase too, but it is very unlikely as of now. So small bites will help you digest better.
Good luck biting and chewing!
