Author Topic: SWY - Safeway  (Read 77042 times)

FCharlie

  • Sr. Member
  • ****
  • Posts: 303
Re: SWY - Safeway
« Reply #30 on: April 18, 2012, 09:52:43 AM »
From Bloomberg (see attached)


FCharlie, don't you have any concerns about what happens to your equity position if cash flow declines in a recession? Further, think about what happens if cash flow declines, borrowing costs will go up substantially on any debt that they need to rollover (like their 30-45 CP program). Bernanke and the Fed, broadly, have the ability to control treasury rates (at least for the forseeable future). However, that says nothing about what will happen to credit spreads over those rates.

The confidence I have comes from historical performance. For example,

OPERATING CASH FLOW:
2007 $2.19 billion
2008 $2.25 billion
2009 $2.54 billion
2010 $1.84 billion
2011 $2.02 billion

Next, Look at LT Debt maturites

2012 $806.9 million @ 5.81%
2013  $   1.6 million @6.72%
2014  $1,048.7million @ 5.18%
2015  $  41.3 million @ 2.48%

2012's debt has already refinanced.
2013's debt is de minimis
2014's debt is material, but it's the only material maturities for the next four years.

I truthfully don't have any concern for future maturities. This isn't a roller coaster business. The core business generates huge cash flow. Even during the worst of times, 2008-2009, operating cash flow was nearly $5 billion. Free cash flow those two years, the worst of all years, was over $2.5 billion.... which is almost half of today's market cap. Tell me something that has changed in the core business that would require me to assume operating cash flow will diminish materially?  Regarding future interest rate increases, remember, the goal of the business is to allocate capital to the highest use. Today, the highest return use is share repurchase. In the future, if there are higher interest rates or a lower FCF yield because of a higher stock price, you could find management aggressively repaying debt, which will be great. Hopefully they will be repaying debt with significantly lower shares outstanding.


FCharlie

  • Sr. Member
  • ****
  • Posts: 303
Re: SWY - Safeway
« Reply #31 on: April 26, 2012, 08:25:28 PM »
Safeway has repurchased 29.1% of it's shares in the past SIX MONTHS....

And No One cares....

If  it weren't for a timing difference between the end of the calendar year and the end of the fiscal year, operating income would have been exactly the same as Q1, 2011, which would have left E.P.S. beating analyst estimates by 15% or more....

And No One cares....

Safeway's free cash flow yield is 18% and rising....

And No One cares...

Safeway has increased it's dividend by over 20% annually for six years in a row...

And N....


gokou3

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 512
Re: SWY - Safeway
« Reply #32 on: April 26, 2012, 10:04:15 PM »
FCharlie,

I have been following this thread and am intrigued by the wonderful FCF yield.  So, I did a little digging myself and pulled out the financial info for the last 10 years.  I notice something interesting: the cumulative FCF over the past 10 years is about 2.8x of the cumulative net income over the last 10 years!  I am sure there are some non-cash writedown somewhere etc, but still a 2.8x difference seems awkward to me.  Can you shed a light on what might have happened?  Is the company slowly liquidating?

I used morningstar data:
http://financials.morningstar.com/ratios/r.html?t=SWY&region=USA&culture=en-us

Thanks for the idea and great details.

FCharlie

  • Sr. Member
  • ****
  • Posts: 303
Re: SWY - Safeway
« Reply #33 on: April 27, 2012, 03:54:45 AM »
FCharlie,

I have been following this thread and am intrigued by the wonderful FCF yield.  So, I did a little digging myself and pulled out the financial info for the last 10 years.  I notice something interesting: the cumulative FCF over the past 10 years is about 2.8x of the cumulative net income over the last 10 years!  I am sure there are some non-cash writedown somewhere etc, but still a 2.8x difference seems awkward to me.  Can you shed a light on what might have happened?  Is the company slowly liquidating?

I used morningstar data:
http://financials.morningstar.com/ratios/r.html?t=SWY&region=USA&culture=en-us

Thanks for the idea and great details.

Hello, Gokou3

The largest contributor to the difference between GAAP net income and FCF is a $1.8 billion non-cash goodwill charge in 2009. That alone takes your 2.8 number down to 1.7

Other factors that explain the difference would be Morningstar using numbers directly off the cash flow statement which are slightly skewed by the growth of Blackhawk, the Safeway subsidiary. Remember that as Blackhawk grows, they take in ever larger amounts of cash, nearly all of which will at some point be redeemed when people use their gift cards.

By the way, when I referenced free cash flow earlier in this thread, I was referring to free cash flow after adjusting for Blackhawk. After this adjustment, you're talking $4.1 billion of cumulative FCF over the past four years, which is 82% of today's market cap.

Rabbitisrich

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1066
Re: SWY - Safeway
« Reply #34 on: April 27, 2012, 07:28:14 AM »
The 10 year scale also includes losses from the sale of Dominick's in 2002.

FCharlie, any particular reason that you use Adjusted CFO - CAPEX for your valuation? I just assume that working capital adjustments wash out over time so I start from Adjusted EBITDA and work to CAPEX (although I leave in tax benefits for impairments). Both methods provide attractive trailing FCF yields, but there is about a $384 M difference over the last 4 years cumulative.

A_Hamilton

  • Lifetime Member
  • Sr. Member
  • *****
  • Posts: 341
Re: SWY - Safeway
« Reply #35 on: April 27, 2012, 07:42:11 AM »
The 10 year scale also includes losses from the sale of Dominick's in 2002.

FCharlie, any particular reason that you use Adjusted CFO - CAPEX for your valuation? I just assume that working capital adjustments wash out over time so I start from Adjusted EBITDA and work to CAPEX (although I leave in tax benefits for impairments). Both methods provide attractive trailing FCF yields, but there is about a $384 M difference over the last 4 years cumulative.

Yes, when looking at SWY it's important to realize that they've taken $5 billion in asset writedowns/goodwill hits with Dominick's sale and Von's writedown. All of these acquisitions were made when operating margins were 4% instead of 2% in the grocery space, so thse assets weren't worth nearly what Steven Burd and Co paid for them.

FCharlie

  • Sr. Member
  • ****
  • Posts: 303
Re: SWY - Safeway
« Reply #36 on: April 27, 2012, 09:45:27 AM »
The 10 year scale also includes losses from the sale of Dominick's in 2002.

FCharlie, any particular reason that you use Adjusted CFO - CAPEX for your valuation? I just assume that working capital adjustments wash out over time so I start from Adjusted EBITDA and work to CAPEX (although I leave in tax benefits for impairments). Both methods provide attractive trailing FCF yields, but there is about a $384 M difference over the last 4 years cumulative.

Mainly I adjust cash from operations because the company does. Look at page 27 of the 2012 Safeway annual report. They back out the impact of Blackhawk so the company doesn't "appear" to be gushing free cash flow in Q4 and "appear" to be burning cash in Q1.

In their words "Cash from the sale of third-party gift cards is held for a short period of time and then remitted, less our commission, to card partners. Because this cash flow is temporary, it is not available for other uses, and it is therefore excluded from our calculation of free cash flow."
« Last Edit: April 27, 2012, 10:05:14 AM by FCharlie »

FCharlie

  • Sr. Member
  • ****
  • Posts: 303
Re: SWY - Safeway
« Reply #37 on: April 27, 2012, 10:20:08 AM »


Yes, when looking at SWY it's important to realize that they've taken $5 billion in asset writedowns/goodwill hits with Dominick's sale and Von's writedown. All of these acquisitions were made when operating margins were 4% instead of 2% in the grocery space, so thse assets weren't worth nearly what Steven Burd and Co paid for them.

Yep. Past shareholders have paid the price. It's sort of like Bank of America. You can't criticize the current BofA for the assets of 2006/2007. The pain has been inflicted. The company has absorbed nearly a hundred billion of net charge offs, the past shareholders have suffered extreme dilution, but to a new shareholder, BofA is a dream.  Safeway also. Steve Burd may have overpaid for Vons, Dominicks, and everything else, but what's left today is a cash machine and a hated stock.  Sometimes that creates the best possible situation, especially when the company repurchases (at 5 times FCF) 29% of it's shares in the past SIX Months.

StubbleJumper

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1079
Re: SWY - Safeway
« Reply #38 on: May 02, 2012, 09:10:30 AM »
I scrawled down SWY on my "to do" list a month ago.  Finally browsed the annual today.  Fascinating.  I hate the industry, but the FCF yield has become silly.  Thanks for posting the idea.


A couple of miscellaneous questions/observations:

1) Does anyone else wonder why the top 5 execs earned $25m last year to operate a grocery chain?  Really, it's not like launching the space shuttle...

2) I seem to recall reading that the execs have about 33m options outstanding under their option program.  Since there are only 268m shares outstanding, that's one hell of a pile of options.  It's a curious thing that they didn't just crank up the dividend to $1/sh about 4 or 5 years ago since they were swimming in FCF (which would be a juicy yield at today's prices).  Why is my Spider-sense™ tingling about this?  It really feels like management is trying to get those options "into the money"  through the buy-backs and have even taken on a bit of debt to get there.  Am I being paranoid (wouldn't be the first time!)?


SJ

twacowfca

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 2665
Re: SWY - Safeway
« Reply #39 on: May 02, 2012, 11:30:06 AM »
I scrawled down SWY on my "to do" list a month ago.  Finally browsed the annual today.  Fascinating.  I hate the industry, but the FCF yield has become silly.  Thanks for posting the idea.


A couple of miscellaneous questions/observations:

1) Does anyone else wonder why the top 5 execs earned $25m last year to operate a grocery chain?  Really, it's not like launching the space shuttle...

2) I seem to recall reading that the execs have about 33m options outstanding under their option program.  Since there are only 268m shares outstanding, that's one hell of a pile of options.  It's a curious thing that they didn't just crank up the dividend to $1/sh about 4 or 5 years ago since they were swimming in FCF (which would be a juicy yield at today's prices).  Why is my Spider-sense™ tingling about this?  It really feels like management is trying to get those options "into the money"  through the buy-backs and have even taken on a bit of debt to get there.  Am I being paranoid (wouldn't be the first time!)?


SJ

The long term problem is the pension plan run by the union that's extremely underfunded.  Under the agreement with the union, they don't have to set realistic return assumptions or pay what they should have to pay into the plan to fund it's obligations -- yet.  But there will come a time of reckoning.

The management is playing games with the technicality that under GAAP they don't have to recognize the huge deficiency because that's the union's responsibility.  Thus all the 'free' cash flow.

What's going on is gamesmanship between the shorts who recognize the huge latent pension deficiency and the mediocre business vs management that wants to pump up the stock with free cash flow that shouldn't be there if realistic projections were used for the pension liability.
« Last Edit: May 02, 2012, 11:32:51 AM by twacowfca »