Post edited 6:59 pm – February 23, 2011 by farmer454
Winn-Dixie recently reported it's second quarter results for
fiscal year 2011. While the results themselves were far from exciting, I
do find this business to be intriguing nonetheless. Winn-Dixie appears to
be an opportunity to invest in the ugliest, most beaten-down business in an
ugly, beaten-down sector. Due to fierce competition and the recession,
grocers have had to slash prices drastically to draw newly penny-pinching
customers to their stores. That combined with the mundane nature of the
grocery business has driven investors elsewhere. But to the value
investor though, this should be appealing. Since mid 2007, the shares
have fallen from over $30 to approximately $7 today.
My understanding is that most value investors employ the discounted cash flow
method of valuation. This business can not be valued using the DCF method
because it is not generating any free cash flow. In fact, Winn-Dixie
reported a net loss of $0.43/share. This is a Balance Sheet play.
In 2006, Winn-Dixie emerged from a bankruptcy that appears to have been very
beneficial for the company. Since then, its balance sheet has looked
great. In its most recent quarterly report, the company reported over
$108M in cash or $1.95/outstanding share and no long term debt whatsoever.
Today, it is trading around $7/share. With a book value per share of
$14.83 ($827,723,000/55,808,675 shares), it is trading at a 53% discount to
book value. What excites me in particular is that the stock is trading at
a 37% discount of it's net tangible assets. (($827,723,000-$210,753,000)/55,808,675
shares). When you look at it from this angle, the stock appears to be
incredibly cheap to me.
Competitor Kroger has a book value of $8.28/share and is trading at 2.8 times
book value with $7.26B in long term debt. Supervalu has a book value of
$5.94/share and is trading at 1.5 times book value with $7.02B in long term
debt. Finally, Safeway has a book value of $13.07/share and is trading at
1.7 times book value with over 9.5B in long term debt. If at minimum, the
price of Winn-Dixie's stock can return the same multiple as Supervalu's 1.5
times BV, Winn-Dixie would be trading at $22.25/share.
As good as the Balance Sheet looks, it can not be sustained unless the company
starts generating some free cash flow. Some things worth noting is that
EBITA has improved by $34.3M over the previous quarter. That have shut
down 30 of their most under-performing stores. Although this contributed
to a loss from discontinued operations of $0.03/diluted share, it will surely
improve the company's long term outlook. In addition, Peter Lynch has
been the Director of Winn-Dixie since 2007. Mr. Lynch is highly
experienced with a long and successful career in the grocery business prior to
joining Winn-Dixie. Lastly, it's worth noting that Winn-Dixie has begun
remodeling many of their stores. In their report, they mention that sales
are improving the the remodeled stores. While this has offset some
losses, not enough stores have been remodeled and/or sales have not improved
enough to negate the losses from the unremodeled and under-performing stores.
It appears to me that Winn-Dixie will not only survive, but with each passing
quarter, is making real progress on the road to recovery. I believe that
while it is still in the early stages, Winn-Dixie is on it's way to a
turnaround.
Any thoughts or feedback would be very welcome. Thanks!
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