Earnings Are Second Fiddle for Supervalu

With shares of Supervalue Inc. (NYSE:SVU) trading at around $3.52, is SVU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

12-supervaluIt’s not often that earnings play second fiddle to other news, but this is one of those cases. Supervalu announced that it will sell five supermarket chains to Cerberus. The five chains being sold are Albertson’s, Acme, Jewel-Osco, Shaw’s, and Star Market. They are being sold for $100 million in cash and $3.2 billion in debt. Cerberus will also buy up to 30 percent of the remaining Supervalu for $4 per share once the sale is complete. This is a huge deal for Supervalu, which has been struggling to find ways to compete with less-traditional grocers. Food inflation and drought have also brought unexpected challenges.

It should be noted that the short position on Supervalu was 40.30 percent prior to this announcement. Therefore, if the stock continues to climb higher (it closed up 14.14 percent today,) more shorts are going to feel the pressure and cover, which will then lead to even higher stock prices. This is commonly known as a short squeeze, and the odds of it happening are higher when the short position is over 10 percent, let alone 40 percent.

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Ah yes… earnings. It’s really a footnote in this situation since the landscape will completely change, but for those who are interested, Q3 EPS came in at $0.08 versus an expectation of $0.06. Revenue came in at $7.81 billion versus an expectation of $7.92 billion. Looking at YoY, earnings were a vast improvement while revenue saw a moderate decline. You can see more on this soon. For now, let’s take a look at some important numbers for Supervalu. They’re not as important as they used to be, but they will give you an idea of where the company is coming from, and the improvements that are likely to be seen.