UPDATE: Morgan Stanley Resumes Coverage on SUPERVALU with Underweight Rating, $3.50 PT on Expected Earnings Erosion, High Financial Leverage

In a report published Wednesday, Morgan Stanley analyst Mark Wiltamuth resumed coverage on SUPERVALU

with an Underweight rating and $3.50 price target. In the report, Wiltamuth noted, “We are resuming coverage of Supervalu with an Underweight rating as we still see earnings erosion ahead and financial leverage remains high. Current valuation at 5.3x EV/EBITDA looks too high relative to Kroger and Safeway (at 5.2-5.9x), but Cerberus' presence and 18% stake may limit downside...With the recent tender now closed, Cerberus now owns 18% of SVU shares. As Cerberus disclosed that it had offered $4/share for all of Supervalu (but failed to achieve financing), we believe the market may assume that a buyout of the rest of Supervalu is a possibility at some point (there is a standstill in place for 7 years). We expect shares to trade at a discount to this $4 mark. Our $3.50 target price assumes 4.75x EV/EBITDA on F2014 estimates.” SUPERVALU closed on Tuesday at $4.81.