Supervalu: Business + Save-A-Lot Spin-Off = Buy?

In a report published Wednesday, Deutsche Bank analyst Karen Short discussed SUPERVALU INC. SVU's announcement in its first quarter print that it is exploring a spin-off of Save-A-Lot.

SuperValu reported its first quarter results and earned $0.23, exceeding Short's $0.21 estimate and the consensus estimate of $0.20. "More importantly," the company said it was exploring a potential spin-off its Save-A-Lot business into a standalone, publicly-traded entity. The remaining business will consist of the "more complimentary" independent Business (wholesale distribution) and Retail Food (traditional supermarkets) segments.

"In our view, Save-A-Lot was always an outlier under the SuperValu umbrella given its strong growth potential, differentiated concept, and significant white space growth opportunity in existing and new markets leading to five to seven percent unit growth going forward," Short wrote.

Short also pointed out that SuperValu's fundamentals are improving (first quarter EBITDA grew 9 percent year-over-year) and the stock's valuation is "attractive" at a calendar year 2016 EV/EBITDA of 5.3x.

Shares remain Buy rated with an unchanged $13 price target.

Morgan Stanley: Key Information Missing

Vincent Sinisi of Morgan Stanley commented in a note that SuperValu's spin announcement "lends support" to the stock and is likely to limit downside. However, the analyst noted that key details are still unknown and investors should continue viewing Save-A-Lot as a normal operating segment within SuperValu.

Sinisi expanded that key details he is looking for includes the structure of the separation, timing of the transaction, how the genetic make-up of SuperValu will change, potential tax implications, detail on capital allocation by segment, and the relationship between SuperValu and Save-A-Lot post spin.

Shares were upgraded to Equal-weight from Underweight with an unchanged $9 price target.