Stocks & Markets November 1, 2010, 7:45PM EST

Stock Analysts Agree: Supervalu Is no 'Buy'

Of 14 Wall Street analysts who follow the supermarket company, none recommend the shares, spurring some contrarian investors to seek opportunity as Supervalu pays down debt

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Supervalu (SVU) may be the least-loved large-cap stock on Wall Street: Not one of the 14 analysts who cover the supermarket company recommends that investors buy shares. Among the seven stocks in the Standard & Poor's 500-stock index without a buy rating, Supervalu is followed by the largest number of analysts, according to Bloomberg data.

Ordinarily diplomatic—and cautious when criticizing companies they cover—analysts are blunt about Supervalu, a 150,000-employee grocery chain that sells under various brands, including Albertsons on the West Coast, Acme in Philadelphia, Jewel in Chicago, and Shaws in New England.

"I don't think they're going to be able to recover from their current challenges," says Karen Short, an analyst at BMO Capital Markets, who rates the shares "market perform."

"Their base business is in a very poor position," says Jefferies & Co. analyst Scott Mushkin, who says shareholders would probably be better off if the company were broken up and sold to competitors. He has a "hold" rating on the shares.

In second-quarter results reported on Oct. 19, Supervalu's same-store sales fell 6.4 percent and total sales dropped 8.5 percent, to $8.66 billion, vs. year-earlier results. As consumers defected to other retailers, the chain's customer count was down 3.9 percent from a year ago, a decline that Janney Capital Markets analyst Jonathan Feeney called "awful." Feeney gives the shares a "neutral" rating.

Minuscule Price-to-Earnings Ratio

In the counterintuitive world of stock investing, unanimous negativity can attract buyers looking for a deal. "Overpessimism is what attracts us to the stock," says Thomas Villalta, lead portfolio manager of the Jones Villalta Opportunity Fund (JVOFX), a Supervalu shareholder. He says the stock is "significantly undervalued."

Supervalu shares are down 14 percent in 2010, compared to supermarket chains Kroger (KR) and Safeway (SWY), which are up 7.2 percent and 7.6 percent, respectively. For Supervalu, the price-to-earnings ratio, a common measure of valuation, is 6. For mass-market retail peers, the average p-e is 15, according to a Bloomberg data measure that includes Wal-Mart Stores (WMT), Kroger, Safeway, Whole Foods Market (WFMI), CVS Caremark (CVS), and Walgreen (WAG).

Craig Herkert, a former Wal-Mart executive, took over as Supervalu's chief executive officer in May 2009 and is trying to turn the company around by cutting costs, lowering prices, and paying down debt. "It may be too little, too late," says Ajay Jain, an analyst at Hapoalim Securities, who has a "neutral" rating on shares.

Analysts' list of concerns about Supervalu start with its debt load. At the end of the last quarter, the chain had $7.1 billion in total debt, most stemming from the acquisition of the Albertsons grocery chain in 2006, which more than doubled its sales while increasing its debt load sixfold.

Few worry that Supervalu could default on this debt soon. In fact, the company is paying debts down faster than it had previously indicated, including a $650 million reduction forecast by the company for this fiscal year, which ends in February.