http://www.frankvoisin.com/
A reader passed along this idea that I find compelling (though the debt load adds a dimension of risk that I like to avoid). Please leave your comments below.
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Frank’s Disclosure: No position.
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Overview
Roundy’s (NYSE: RNDY) is the largest grocery retailer in Wisconsin and operates 158 grocery stores in Wisconsin, Minnesota and Illinois under the Pick ‘n Save, Rainbow, Copps, Metro Market and Mariano’s Fresh Market banners. The company trades at an attractive multiple of 7.1x 2012E EPS and (although not readily apparent to all) will soon begin paying a large dividend that currently equates to a 9% yield. The company went public in February and recently gave 2012 guidance, but is largely unknown since sell side analysts are still restricted from publishing on the company. However, with investors seeking yield and investments in what are considered recession resistant industries such as supermarkets, its not surprising RNDY’s is beginning to receive more investor attention.
The following table shows the number of stores operated by geographic market as of November 1, 2011:
| Geographic Market | Number of Stores | Banners in Market |
| Wisconsin | ||
| Milwaukee | 60 | Pick ‘n Save, Metro Market |
| Madison | 15 | Pick ‘n Save, Copps |
| Racine | 6 | Pick ‘n Save |
| Appleton | 5 | Pick ‘n Save, Copps |
| Oshkosh-Neenah | 4 | Pick ‘n Save, Copps |
| Other | 32 | Pick ‘n Save, Copps |
| Total Wisconsin | 122 | |
| Minneapolis/St. Paul | 32 | Rainbow |
| Chicago | 4 | Mariano’s Fresh Market |
| Total Stores | 158 |
Below is a list of the company’s market position in its primary markets:
| Core Market | Market Position | Approximate Market Share (2) |
| Wisconsin | ||
| Milwaukee | #1 | 55% |
| Madison | #1 | 33% |
| Racine | #1 | 35% |
| Appleton | #2 | 22% |
| Oshkosh-Neenah | #1 | 39% |
| Minneapolis/St. Paul | #3 | 12% |
Valuation
The company went public in February, so much of the information in many databases (and the latest earnings press release) is incorrect since it is not pro forma for the offering. The below information is pro forma for the offering.
| Stock Price: | $10.18 |
| Shares | 44.8 |
| Equity Cap | 456.1 |
| Cash | 27.8 |
| Debt | 703.9 |
| Enterprise Value | 1,132.2 |
2012 Guidance:
| Adjusted EBITDA | $225 (midpoint) |
| Adjusted EPS | $1.43 (midpoint) |
Valuation:
| EV/Adj EBITDA | 5.0x |
| P/E | 7.1x |
| Dividend Yield | 9.0% |
| Net Debt/ Adj. EBITDA | 3.0x |
Why Stock Is Misunderstood
- The company used proceeds from a recent $110 million IPO to delever and refinance its debt at a much lower rate. However, neither the lower debt balance nor the lower interest rate are reflected in the results listed in databases or even in the company’s recent earning release (the IPO occurred after the quarter ended). Thus, the company’s exact capitalization is not readily apparent unless you closely read the IPO prospectus.
- The company intends to pay a large dividend (currently equivalent to a 9% yield). However, the company has not issued a press release about it nor was it mentioned on the recent earnings call, so many investors may not realize the company even pays a dividend. The IPO prospectus states “We currently intend to declare quarterly dividends of approximately $0.23 per share” and our conversations with management confirm they plan to pay the dividend beginning in May.
- When the company filed to go public, the pricing range was $10-12 per share. The deal ultimately was priced at $8.50 so the stock may have a slight taint due to its weak pricing. However, the stock has traded up since the IPO and is now trading at its 52 week high and within the original pricing range.
Other Considerations
- While the company’s dividend yield of 9% is high for a supermarket stock, the company generates more than enough free cash flow to pay for the dividend.
- The company’s largest shareholder is the private equity firm Willis Stein. Although they sold 3 million shares in the IPO, the firm still owns 20 million shares or 37% of the company. As a result, they remain highly incentivized to create value for all shareholders.
- For 2012 the company is conservatively guiding to total sales growth of 2.5%- 3.5% and SSS of (1.0%) – 0.0%. The modest SSS is a function of (a) Q1 being a difficult comp since last year’s period benefitted from the timing of New Years (relative to the timing of RNDY’s fiscal year end) and additional revenue since the football Packers played more games in the playoffs and (b) lower consumer spending due to a soft economy. Management expects SSS to increase throughout the year and for results to improve in future years as the economy recovers. However, the supermarket sector is obviously highly competitive.
Catalysts
- Dividend initiation – We expect the company to begin to pay its 23c dividend in May. This equates to a 9% yield. Since RNDY has not publicly declared it yet (or even mentioned it in its PR), many people are unaware of the dividend.
- Initiation of analyst coverage from the 7 underwriters including CSFB and JPM – Analysts are currently restricted but can begin to initiate coverage around the middle of March.
- Increased investor awareness – The stock is now trading at its 52 week high so it will likely be on more potential investors’ radar screens. In addition, the company officially gave guidance last Thursday so now it is easier for investors to understand the value created by the IPO’s debt refinancing.
