Author Topic: SWY - Safeway  (Read 77680 times)

FCharlie

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SWY - Safeway
« on: March 19, 2012, 05:08:41 PM »
Hi all. This is cross posted in the General discussion category.

I wanted to run an idea by you guys and see what everyone thinks.

About a year ago I began buying Safeway, around $21.50.  At the time they had 368 million shares outstanding, so we're talking a $7.9 billion market cap.

Safeway produced $2.6 billion of cumulative free cash flow in 2009/2010, and at the time they projected $800 million of free cash flow for 2011. I averaged the 2009/2010 free cash flow with the projections for 2011 and realized that Safeway was sitting there with a 14+% free cash flow yield. Safeway also was very actively repurchasing their shares, which excited me as well.

One year later, here we are. Safeway ended up on target with their free cash flow. They got even more aggressive with the share repurchase at the end of 2011, so for the year, Safeway repurchased 19.5% of their shares during 2011. Subsequent to the end of 2011, Safeway has further repurchased 9.4% of it's shares this year, only a couple of months in. Today, they authorized a new $1 billion buyback.

The current Safeway share count is 268 million, the stock price has barely budged. The market cap is now only $5.8 billion, and Safeway has projected $900 million of free cash flow for 2012, and has projected cumulative free cash for the next five years of about $5.7 billion, almost equal to their current market cap.  What does Safeway do with their cash?

1)They pay the dividend, which has been increased at 20% annual rates for many years
2) They repurchase stock in large quantities (Safeway has repurchased 40% of it's shares in the past four years)
3) They have been developing entire shopping centers (currently 32 shopping centers under construction as we speak). Safeway has created a subsidiary for the sole purpose of buying land, developing entire shopping centers, anchoring them with new Safeway stores, and renting the entire shopping center with themselves as the landlord.  Safeway by the way currently has $31/share of owned real estate at cost (land + buildings)


The attraction here is simple. Hard assets and free cash flow. What's not attractive about a company that sells for $21.70/share with $31.00/share of real estate, generating around $1 billion annually ($3.75/share free cash flow)   Around a 17.5% free cash flow yield, repurchasing it's own shares at an astonishing rate, and a share price that is unchanged from 15 years ago??

I can happily discuss further, and will respond to questions/comments.. I'm looking for other opinions here. I think Safeway is one of the best deals out there. Cheap & safe.

What do you think?
« Last Edit: March 19, 2012, 05:35:55 PM by Parsad »


Viking

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Re: SWY - Safeway
« Reply #1 on: March 19, 2012, 07:02:55 PM »
FCharlie, thanks for posting the idea. I looked at Super Valu last year. The sector does look interesting. And I bagged groceries as a kid so I have some sentimental attachements (perhaps a watch out?).

What is your take on management? Can they be trusted? Are they owners (i.e. buying stock or already large owners)?

I get nervous when I see a company with a high debt level borrow to buy back 'cheap' shares. Cash flows can shrink (pick a reason) and interest rates can increase fast... resulting in a much lower share price.

I do like that they have been aggressively paying down debt the past few years (2011 excepted).

alertmeipp

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Re: SWY - Safeway
« Reply #2 on: March 19, 2012, 09:27:40 PM »
Do they pay down debt as well?

FCharlie

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Re: SWY - Safeway
« Reply #3 on: March 20, 2012, 03:15:25 AM »
Do they pay down debt as well?

Safeway's historical debt at year end:

2002: $8.45 billion
2003: $7.82 billion
2004: $6.76 billion
2005: $6.35 billion
2006: $5.86 billion
2007: $5.65 billion
2008: $5.49 billion
2009: $4.90 billion
2010: $4.83 billion
2011: $ 5.41 billion

During the past four years, Safeway has actually decreased their total debt levels while simultaneously repurchasing 40% of their shares outstanding. Prior the the past four years, Safeway spent almost all of their cash flow remodeling stores and repaying debt.

FCharlie

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Re: SWY - Safeway
« Reply #4 on: March 20, 2012, 03:34:59 AM »
FCharlie, thanks for posting the idea. I looked at Super Valu last year. The sector does look interesting. And I bagged groceries as a kid so I have some sentimental attachements (perhaps a watch out?).

What is your take on management? Can they be trusted? Are they owners (i.e. buying stock or already large owners)?

I get nervous when I see a company with a high debt level borrow to buy back 'cheap' shares. Cash flows can shrink (pick a reason) and interest rates can increase fast... resulting in a much lower share price.

I do like that they have been aggressively paying down debt the past few years (2011 excepted).
I like Steve Burd, the C.E.O.   He's been with Safeway for twenty years now. He does own a large amount of shares, about 1.5% of the company.

Safeway has been decreasing debt for almost a decade prior to the very end of 2011. I understand some may not like borrowing to repurchase stock, but the grocery business is very stable, in my opinion, Safeway is extremely stable. They've produced an average of $1.1 billion free cash flow the past three years, and are projecting an average of $1.1 billion free cash flow the next five years..  The debt they have is very manageable. Operating cash flow has been very consistent around the $2.1 billion level. Interest expense has declined eight years in a row.

Yearly interest expense:

2003: $442 million
2004: $411 million
2005: $402 million
2006: $396 million
2007: $389 million
2008: $358 million
2009: $332 million
2010: $298 million
2011: $272 million

Packer16

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Re: SWY - Safeway
« Reply #5 on: March 20, 2012, 05:06:35 AM »
Where did you find that the average projected FCF is $1.1 billion for the next five years.  Over the past 3 years it declined from $1.4 billion to $700 million and is projecting $900 million in FCF next year.  How do you get comfortable the decline will not continue?  Thanks for the idea.


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FCharlie

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Re: SWY - Safeway
« Reply #6 on: March 20, 2012, 05:57:35 AM »
Where did you find that the average projected FCF is $1.1 billion for the next five years.  Over the past 3 years it declined from $1.4 billion to $700 million and is projecting $900 million in FCF next year.  How do you get comfortable the decline will not continue?  Thanks for the idea.


Packer

Hi, Packer.

I find projected average free cash flow  on the slides from Investor Day earlier this month. The slides can be found here:

http://www.sec.gov/Archives/edgar/data/86144/000008614412000009/ex9928-kinvestorconference.htm

The reason I'm comfortable the decline will not continue is because the company has  a subsidiary called PDC which develops shopping centers. PDC is the reason free cash flow was slightly lower this past year. PDC is reaching a point where it will self fund itself and that is where the confidence comes in. The core grocery business consistently produces huge free cash flow. This will improve if gas prices keep rising. Food price inflation in the 3% range is very beneficial to grocery stores. Also, as fuel prices rise, Safeway captures more of that market. They are seeing double digit increases in gallons sold even as the industry sees zero growth. It's quite an incentive to offer discounts on fuel for buying groceries. Some places you can get gas for 20 or 30 cents less per gallon for buying $100 of groceries at Safeway.

Besides, the free cash flow per share is what fascinates me. It's approaching $4.00/share right now and the share count keeps declining. They really don't need an improvement in total free cash flow to have the stock do really, really well.


rmitz

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Re: SWY - Safeway
« Reply #7 on: March 20, 2012, 06:15:35 AM »
So, I do find this interesting.  Reinvesting in their stores was exactly what they needed to do to avoid becoming one of the very large graveyard of grocery stores.  A&P being the granddaddy, of course.  There have been so many chains over the years to go away, or at least dramatically reduce in size (and value) that I think it may keep people away from a decent investment here. 

Packer16

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Re: SWY - Safeway
« Reply #8 on: March 22, 2012, 07:52:44 PM »
Does anyone know why Safeway and Supervalu cannot do sale/leaseback transactions to reduce debt or buyback sotck?  They both own more than 40% of their stoers versus Winn Dixie who almost exclusively leases its buildings.  TIA


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FCharlie

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Re: SWY - Safeway
« Reply #9 on: March 23, 2012, 10:42:04 AM »
Does anyone know why Safeway and Supervalu cannot do sale/leaseback transactions to reduce debt or buyback sotck?  They both own more than 40% of their stoers versus Winn Dixie who almost exclusively leases its buildings.  TIA


Packer

They both could do this, I think it's probably not a bad idea for SuperValu... Safeway regularly states that they like owning property, They actually just cited a situation earlier this month where they wanted to buy a property where the land alone cost $20+ million... There was no way they could earn a decent return on a store when the land alone was that expensive, but they ended up closing and selling a nearby property, booking a $20+ million gain on the sale.... so they were able to do what they wanted because of the value created in owning property over time.

Safeway doesn't really need, In my opinion, to reduce debt further. They already have interest expense at the lowest levels in many years, and they are repurchasing stock at 10+% annually as well... The past four years Safeway has repurchased 40% of their shares. They just authorized another $1 billion to buy more so I'd expect more activity this year. That's the beauty here, The price to free cash flow is around six... Meaning even after paying the dividend the company can repurchase about 12% of it's shares annually and not add debt.