SWY - Safeway

[Sportgamma]

Some back-of-the-envelope calculation:

 

The IPO of Blackhawk went through today. SWY sold ~20% of the company for $230M, right?

 

HAWK is up ~13% in the first day of trading, or around $26 per share. So the equity value of the 80% should be around $1B.

 

SWY stock has not budged today and market cap stands at $6.3B.

 

What's truly amazing is that not long ago at all this company had a market cap of only $3.5 billion dollars.  At that price, if you net out the value of and free cash flow from BlackHawk, Safeway had a free cash flow yield of over 40%... Other than Eddie Lampert, raise your hand if you were a buyer back then.

 

FCharlie, I believe I owe you some words of gratitude for tipping me off on SWY. I was a buyer @16.5

 

[fareastwarriors]

Down 18%

 

 

 

 

Safeway Inc. ( SWY ) reported first quarter net income of $0.49 per share Thursday morning, up from $0.27 per share last year. The consensus estimate was for EPS of $0.36. Quarterly sales and other revenue totaled $10 billion, essentially flat compared with last year, while it missed consensus estimates of $10.14 billion.

 

Safeway's EPS guidance for 2013 remains unchanged at $2.25 to $2.45. Analysts project annual earnings of $2.30 per share.

 

Safeway gapped open lower Thursday and has fallen sharply in early trade. The stock is now down 4.30 at $23.96. Safeway has dropped to over a 1-month low and has fallen below its 50-day moving average.

 

 

 

 

[Palantir]

This bad boy's been falling. Time to initiate coverage!

[FCharlie]

When I do the math on Safeway it still shocks me that the stock price is this low.

 

http://www.sec.gov/Archives/edgar/data/86144/000008614413000012/freecashflow.jpg

 

The company, on average, produced $950 million of free cash flow annually for the past five years. They project more of the same this year. Guidance is $900 million FCF.

 

They own 73% of HAWK which implies $1 billion of SWY's market value is HAWK.

 

If you subtract $1 billion from SWY's market cap you have $4.5 billion

 

That gives you an 18%+ free cash flow yield on today's purchase price, even after subtracting the earnings of BlackHawk.

 

SWY owns nearly $9 billion of real estate at cost. That's $37/share.

 

SWY is expecting to have debt at the lowest levels in many years by year end.

 

After an entire year in which capital allocation strategy was 1) Dividend 2) Debt Repayment, next year SWY expects to return to the traditional capital allocation strategy of 1)Dividend 2) Share Repurchase.

 

If the price of the stock doesn't move higher, they will be able to literally repurchase 14-15% of shares annually out of free cash flow... Driving FCF/Share, Real Estate/Share, EPS all higher.

 

There's a major disconnect here. I'm not sure I get it.

 

 

[Palantir]

What's your FV estimate, not including Real Estate value? I feel that if we're going to value it as a going concern, the RE value should just be ignored IMO as it will never be monetized.

 

My FV estimate is perhaps slightly higher than what it's trading at (not including the Hawk subsidiary). They haven't seen much growth, so I'm projecting zero growth, and if you back out the cash, it's trading at 10x of last few years' FCF.

[FCharlie]

What's your FV estimate, not including Real Estate value? I feel that if we're going to value it as a going concern, the RE value should just be ignored IMO as it will never be monetized.

 

My FV estimate is perhaps slightly higher than what it's trading at (not including the Hawk subsidiary). They haven't seen much growth, so I'm projecting zero growth, and if you back out the cash, it's trading at 10x of last few years' FCF.

 

 

You know I don't actually have a fair value estimate. I have done calculations and whenever I do the number I end up with is so much higher than the current stock price that it almost doesn't matter.

 

For example... When a company is so cheap relative to it's free cash flow that it could repurchase 100% of it's shares in about six years, that doesn't make any sense. Yes, it's a zero to 2% growth business but it still doesn't make sense.

 

Safeway could raise it's dividend 15% annually and never pay out a dime more of actual cash so long as they can repurchase stock at these prices. If you assume that your future dividend will grow at 15% annually, and let's be clear, it has already grown by about 20% annually for eight years in a row, why would you sell for five or six or seven times earnings? Why wouldn't you sell for 15 or 20 times? The simple math tells you that this price is unsustainable.

 

You mention that we should exclude RE values because they won't be monetized but Safeway has an entire subsidiary built around developing, leasing, and selling real estate. They already report gains from sale of real estate very regularly. The subsidiary is only growing. In my opinion, RE  values are very relevant, and you have to look at RE per share.  That said, if you have RE values (at cost) of nearly $9 billion and rising and you have shares outstanding at 241 million and falling, simple math tells you that the current stock price is unsustainable.

 

The free cash flow, hard assets, and share repurchase are the main things I focus on. Over the past handful of years, say since 2006, SWY has repurchased over 50% of it's shares while simultaneously adding billions of real estate, raising the dividend nearly 20% annually, decreasing debt, adding fuel stations, creating and spinning a minority interest in a a billion dollar subsidiary, and now creating a real estate subsidiary. Notice I say they have decreased debt while doing this. It's all about free cash flow.  What if SWY spends the next few years steadily adding real estate and repurchasing another 50% of it's shares? We would have a company with something like $100 per share of real estate. That has to matter at some point.

 

The beauty here is the simplicity. If the market gives SWY a price this low, SWY continues to buy as many shares as it can and intrinsic value rises and long-term owners benefit. If the market gives SWY a price that is much higher, then the shareholders win anyway. The main argument someone could make against everything I've said would be to say that the core business is crumbling, or will crumble. The reality is, Safeway in 2012 reported record all time high revenues and they grew sales further in Q1 2013.

 

Thoughts?

[longlake95]

Fcharlie,

 

I took a 2% position ( not sure if I will take it higher ) in SWY, after the sell off in April. I don't have much to add to your thesis, I'm thinking much the same way. I think it's important to think about the RE - it can't be ignored. It's a value backstop to SWY.

Yes, SWY is a low growth biz - that's not going to change.

 

Several retailers, here in Canada, have recently spun-out their RE into a REIT, to unlock the value of the RE. Can that happen at SWY? Sure, they own 42% of the stores. The market would love that. That might weave nicely with the RE development div at SWY. We'll see where the new CEO Bob Edwards, takes this division, which old CEO BUrd, thought could pre-tax $70MM with little cap-ex in 5 years. There is also a very well run grocery chain (Metro) here in Canada that recently sold of a large stake in convenience store operator Couch-Tard (ATD-B.TO) and cleared $265MM. They have 50% of that stake they can sell. CEO publicly stated aquisitions may be in the future. Metro has a lot of borrowing capacity.

 

Metro has little presence in the west, where SWY has all of it's Canadian presence. It's a perfect fit for Metro to buy SWY's Canadian assets. I recently heard a number flying ( from a CDN analyst) around that SWY Canada could be worth $5B - or $22MM/store. Sounds a little high ( metro is selling at $18MM/store, and is a better operator) but he's a lot smarter than I am, LOL. Even if it's worth half that - you're unlocking 1/2 of SWY's current mcap.

 

If inflation can stay tame, maybe we will see margins move higher - reversing the long steady decline in margins.

 

 

The best part of this thesis is - nobody is talking about grocery stores. They are very boring. It's definately not a crowded trade.

 

I just don't see a lot of downside.

 

 

 

 

[hyten1]

i am new to SWY, just wondering what people thought about:

 

- their debt

- pension obligation

 

hy

[longlake95]

 

Credit Suisse - figures SWY has a $2B, pension deficit. I think we are at the bottom of the underfunding cycle. Higher interest rates, better stock market and cost sharing with employees, I figure should imrpove the pension deficit profile - albeit slowly.

 

As for the debt, it's better then 10 years ago, but not where we'd like to see it of course - it's an easy way to report a high ROE. But, it's manageable at 4x interest coverage. I'm not worried about the latest jump in debt from 2011 to 2012, around $700MM, that was a term credit agreement @0.86%, which they then ploughed back into buybacks. I'll keep an eye on the debt profile going forward. The only upside to this level of debt in my eyes is, if the business improves or they unlock value somehow, the equity will pop quite a bit.

 

 

[Kraven]

Congrats to FCharlie for calling this one correctly!  SWY selling it's Canadian ops for C$5.8 bil.

 

http://finance.yahoo.com/news/safeway-announces-definitive-agreement-sell-202049643.html

[fareastwarriors]

Man I was debating to buy the last few days... but I didn't pull the trigger.

 

up 25%+ after market...

 

 

ouch

[hyten1]

nice, glad i bought a small position earlier today, too bad its a small position

[Palantir]

WTF???????????

 

GAH

[fareastwarriors]

Congrats to FCharlie for calling this one correctly!  SWY selling it's Canadian ops for C$5.8 bil.

 

http://finance.yahoo.com/news/safeway-announces-definitive-agreement-sell-202049643.html

 

+1, great analysis/work on this, FCharlie.

[longlake95]

Sobey's.....who woulda thunck.....thought it would be Metro. Good news anyway....

[Green King]

how do you value this thing ? why does it still look fair priced to me at the current market price ? please help.

 

Cheers

 

Gk

[hyten1]

here is a simplistic update on valuation base on what sobey paid (5.7bil), a very simplistic update

 

sobey paid 5.7bil USD for 414mil in operating profit. swy did 1.1bil in operating profit in 2012.

 

1.1bil / 414mil = 2.66

 

2.66 * 5.7bil = 15.6bil total EV, take out tax of 1.76bil will left you with 14bil in EV

 

before the announcement SWY has a EV of 11bil

 

 

 

 

[FCharlie]

I've never been so disappointed to see one of my largest positions go up so much... Why not just buy another 30 or 40% of shares outstanding and THEN sell the Canadian division??

 

 

[Green King]

here is a simplistic update on valuation base on what sobey paid (5.7bil), a very simplistic update

 

sobey paid 5.7bil USD for 414mil in operating profit. swy did 1.1bil in operating profit in 2012.

 

1.1bil / 414mil = 2.66

 

2.66 * 5.7bil = 15.6bil total EV, take out tax of 1.76bil will left you with 14bil in EV

 

before the announcement SWY has a EV of 11bil

 

I don't think you can give the same multiple for US. There is 1418 stores in US and 223 stores in Canada. 

[hyten1]

green, all i am doing is figure out what operating profit sobey bought with 5.7bil USD

 

and apply that to the rest of operating profit that swy kept

 

yes it quick and dirty, just give you some ball park

 

hy

 

here is a simplistic update on valuation base on what sobey paid (5.7bil), a very simplistic update

 

sobey paid 5.7bil USD for 414mil in operating profit. swy did 1.1bil in operating profit in 2012.

 

1.1bil / 414mil = 2.66

 

2.66 * 5.7bil = 15.6bil total EV, take out tax of 1.76bil will left you with 14bil in EV

 

before the announcement SWY has a EV of 11bil

 

I don't think you can give the same multiple for US. There is 1418 stores in US and 223 stores in Canada.

[mcliu]

Great call. :)

[Rabbitisrich]

Are there any Empire shareholders on the board?

 

Here are the financing plans:

 

Financing of the Transaction

 

The acquisition of Canada Safeway’s assets will be paid for in cash in Canadian dollars. It  is  Empire’s  and  Sobeys’  intention that  financing for the acquisition will come from a combination of the following: (i) a $1.5 billion Empire equity offering; (ii) a planned $1.0 billion sale-leaseback of acquired real estate assets (the “Sale-Leaseback”); (iii) a $1.825 billion term loan and the issuance of $800 million in unsecured notes by Sobeys; (iv) other real estate and non-core asset sales; and (v) available cash  on  hand. As some  of  these transactions may not be completed by the time of closing, Scotiabank has provided Empire  and  Sobeys with fully  committed credit facilities for the full purchase price plus transaction expenses required to close the transaction. Crombie REIT has a right of first offer in respect of any real estate sales undertaken by Sobeys.

[sampr01]

WOW. still at $25 after 5.7 b deal, BUY BUY

Great call. :)

[hyten1]

i think the general concern is the US operation, margin pressure, competition (walmart, target, amazon) etc. is holding the stock back

 

 

[fareastwarriors]

http://blogs.wsj.com/moneybeat/2013/06/13/safeway-sells-canada-for-a-lot-but-gives-up-a-lot/?mod=WSJ_qtoverview_wsjlatest

 

 

Safeway Inc. SWY +9.18%, the grocery-store chain, has made its latest restructuring move in selling its Canadian operations for $5.7 billion, nearly equal to Safeway’s entire market cap on Wednesday.

 

...

 

That the sale was even higher has some analysts gushing Thursday. (Safeway expects to collect closer to $4 billion after taxes, still, that’s about 70% of its current market cap.)

 

...