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Cheap Groceries At Winn Dixie
Grocery stores are not the type of businesses that draw excitement, but for a value investor, boring is good. And despite selling food, grocery stories are not the stable growers one would come to think they would be. As the economy tanked over the past few years, grocers have competed aggressively by slashing prices in order to lure in budget-conscious consumers. As a result, margins will weaken and profitability will erode. In addition, no matter the state of the economy, the grocery industry has been greatly effected by the entrance of Wal-Mart (NYSE: WMT) into the mix. For many, Wal-Mart's lower prices are too good to resist.
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A Good Bankruptcy
Despite the aforementioned advantages, Winn Dixie (Nasdaq:WINN) shares look too cheap to not merit a closer look. Winn Dixie is grocery chain that emerged from bankruptcy a few years ago. Over the years, Winn Dixie was weakened by the emergence of entrants like Wal-Mart and other grocers like privately held Publix. Publix with its newer, cleaner stores staffed with friendly staff appealed to the hassle-free shopper who did not want to navigate a large store like Wal-Mart. Winn Dixie could not differentiate itself from Wal-Mart and other major grocery chains. The company's need to re-create itself and bankruptcy helped do just that.
Cheap Food
While Winn Dixie may still suffer from the same threats, it's in a much better position today. The shares trade for $10.50, which gives the company a market cap of some $570 million. The balance sheet is one of the best in the industry with over $150 million in net cash. Kroger (NYSE:KR) has over $8 billion debt against a $12 billion market cap. Supervalu (NYSE:SVU) has over $7 billion in debt against a $2.7 billion market cap. Even more so, the company trades at a significant discount to book value of $16.50 a share. The company is now profitable and generates over $7 billion in sales, for a price-to-sales ratio of 0.08. Kroger and Supervalu trade at 2.7 times and 1.0 times book value, respectively.
Winn Dixie's profit margins are meager today, at less than 50 basis points, but that creates an opportunity for tremendous bottom line growth. Improving profits to 1.5%, while certainly not an easy task, is clearly feasible today given the strong financial position the company is in. A net margin of 1.0% of sales would produce net income of over $70, which would imply a current P/E of less than nine times earnings. On a EV basis the earnings multiple would be less than six.
Margin of Safety
With a pristine balance sheet, positive cash flow generation and trading at a large discount to book value, Winn-Dixie shares are too cheap to ignore at today's prices. The shares offer an attractive margin of safety in a world where very little of that exists today. (For more stock analysis, take a look at 4 Solid Foreign Banks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 8 Tips For Starting Your Own Business
A Good Bankruptcy
Despite the aforementioned advantages, Winn Dixie (Nasdaq:WINN) shares look too cheap to not merit a closer look. Winn Dixie is grocery chain that emerged from bankruptcy a few years ago. Over the years, Winn Dixie was weakened by the emergence of entrants like Wal-Mart and other grocers like privately held Publix. Publix with its newer, cleaner stores staffed with friendly staff appealed to the hassle-free shopper who did not want to navigate a large store like Wal-Mart. Winn Dixie could not differentiate itself from Wal-Mart and other major grocery chains. The company's need to re-create itself and bankruptcy helped do just that.
While Winn Dixie may still suffer from the same threats, it's in a much better position today. The shares trade for $10.50, which gives the company a market cap of some $570 million. The balance sheet is one of the best in the industry with over $150 million in net cash. Kroger (NYSE:KR) has over $8 billion debt against a $12 billion market cap. Supervalu (NYSE:SVU) has over $7 billion in debt against a $2.7 billion market cap. Even more so, the company trades at a significant discount to book value of $16.50 a share. The company is now profitable and generates over $7 billion in sales, for a price-to-sales ratio of 0.08. Kroger and Supervalu trade at 2.7 times and 1.0 times book value, respectively.
Winn Dixie's profit margins are meager today, at less than 50 basis points, but that creates an opportunity for tremendous bottom line growth. Improving profits to 1.5%, while certainly not an easy task, is clearly feasible today given the strong financial position the company is in. A net margin of 1.0% of sales would produce net income of over $70, which would imply a current P/E of less than nine times earnings. On a EV basis the earnings multiple would be less than six.
Margin of Safety
With a pristine balance sheet, positive cash flow generation and trading at a large discount to book value, Winn-Dixie shares are too cheap to ignore at today's prices. The shares offer an attractive margin of safety in a world where very little of that exists today. (For more stock analysis, take a look at 4 Solid Foreign Banks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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