UPDATE: Goldman Sachs Downgrades SuperValu, Reinstates On Safeway On ACA Costs And Cuts to SNAP Benefits
In a report published Monday, Goldman Sachs analyst Stephen Grambling downgraded SuperValu (NYSE: SVU) from a Neutral rating to a Sell rating and lowered the price target from $6.00 from $8.00, reiterated a Sell rating on Kroger Company (NYSE: KR) while maintaining a price target of $37.00, and reinstated a Neutral rating on SafeWay (NYSE: SWY) while setting a price target of $34.00.
In the report, Goldman Sachs said about SuperValu: "On November 17, we downgraded SVU to Sell from Neutral with 13% downside risk to our new $6, 12-month price target vs. 1% downside for our coverage. While we have been encouraged by the new management team's success in effecting change, we believe cuts to food stamps (SNAP benefits), potential reductions to the transition service agreement, and encroaching competition will likely overwhelm operational improvements. With the shares now trading above the historical average and roughly in line with peers, we expect future downward revisions to consensus estimates will likely drive a re-rating of the shares to a more normalized level. The likely combination of lower Street EPS estimates and valuation re-rating underscores the 13% downside risk to our new $6, 12-month price target."
Goldman Sachs said about Kroger: "While KR is the best in-class operator in the supermarket space and the consolidator of the group, we do not believe it will be immune from mounting headwinds. In addition, the shares also trade at a premium to historical ranges, suggesting the shares may be discounting greater than anticipated synergies from the announced HTSI acquisition. KR anticipates $0.06-$0.09 of synergies but even on our estimates, the implied NTM P/E would be at a premium valuation relative to history at $0.15 of accretion. With expectations and valuation elevated even as tailwinds fade, we maintain our Sell rating."
Goldman Sachs said about Safeway: "On November 17, we removed the NR designation from Safeway Inc. (SWY) shares following the sale of the company's Canadian assets to Sobeys Inc., a wholly owned subsidiary of Empire Company Limited. We now have a Neutral rating on SWY with a 12-month price target of $34, equating to 1% downside. SWY shares now trade at 20X our CY14 EPS and 7.6X our CY14 EBITDA, a premium to history and peers. In our view, this premium appropriately balances potential upside from management's ongoing strategic review to maximize shareholder value with the company's challenged fundamentals."
SuperValu closed on Friday at $6.88, Kroger closed on Friday at $42.60, and Safeway closed on Friday at $34.52.
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