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Two Grocers to Buy and One to Sell

Tuesday - 7/30/2013, 2:47pm  ET

The grocery sector has always been extremely competitive, and it is often those who offer the best deals that come out on top. However, the industry is divided into those who cater to the general public, which is usually the middle class, and those who price products for bargain shoppers. Those who market their products to the general public often experience increased revenue as they increase their offerings. The bargain retailers that can lower expenses to the point where they are selling at rock-bottom prices, on the other hand, will win that segment. 

Sysco increases offerings

Sysco has consistently consulted with customers to see how the company can increase their offerings to meet demand. This allows the firm to better cater to each customer, increasing the loyalty among those customers in the years ahead by offering them what they want. This has resulted in the company offering products in health care, education and lodging as well.

Furthermore, the company's growth through acquisitions shows that it will be able to profit in the future. This year alone Sysco bought Appert's Foodservice, Ohio Central Seafood Company, Buchy Food Service, Metro Richelieu and Fla. Distagro.

Analysts don't believe that these acquisitions will pay off in the near-term as it usually takes a while to integrate recently-purchased businesses. This year, analysts expect a 5% decrease in earnings per share (EPS), but that looks to recover next year when the company is expected to increase its EPS by 8.5%. Revenue is expected to increase by 5% this year and 5.5% next year. The rising revenue and falling EPS indicates an increase in operating expenses associated with the purchases.

Supervalu faces too much competition from Wal-Mart

Supervalu has shed about $3.2 billion of around $6 billion in debt recently when it sold 877 units to Cerberus Capital investment group. That has helped shares skyrocket from about $2.50 at the beginning of the year to around $8 today. 

I think that the shareholders got too excited, however. The deal with Cerberus resulted in the sale of Albertsons, Acme, Jewel-Osco, Shaw's and Star Market, putting a greater emphasis on the company's supermarkets. Unfortunately, with Wal-Mart  opening 700-800 small stores per year that offer the same type of merchandise as Supervalu, the market is becoming much tougher for the company's subsidiary Save-A-Lot.

Analysts don't agree. They have staggering expectations of the company since its consolidation, and anticipate a 450% increase in EPS this fiscal year. Next year, they anticipate the firm will increase by another 37%. I still don't believe that Supervalu will be able to increase its market share, however, due to the strength of Walmart in the industry. 

Wal-Mart continues to drop prices

Wal-Mart has a price advantage over many of its competitors, and even over other discount grocers. It is facing challenges in the form of competition from dollar stores, however. This has resulted in the company lowering its prices even more, and it has committed to dedicate $2 billion in price cuts in 2014. I believe that this will result in Wal-Mart regaining some of the market share that it has lost to dollar stores. Furthermore, it will make it much more difficult for its discount grocer counterparts such as Supervalu to stay competitive.

Analysts agree. They have steady growth expectations for Wal-Mart. Revenue is expected to grow by 3.9% during this fiscal year and another 4.6% next year. The company's EPS is set to climb 5.5% this fiscal year and 10% next. The move to lower prices will result in a gradual uptake in the consumer market as customers begin to notice the increasingly lower prices at the store.

Where to put your money

I like the prospects of Sysco and Wal-Mart, but I wouldn't buy Supervalu. Sysco will continue to increase its clientele as it moves into other segments, and the new products it is offering are already locked into demand due to the company's strategy of consulting its customers. Wal-Mart will win the battle for bargain-grocer supremacy due to its ability to lower its prices as a result of its low operating expenses. Wal-Mart also has the advantage of being able to fund its massive expansion plan. Keep an eye out for returns at Supervalu, however, as the company may be able to increase its operating efficiency as a result of its recent sales.

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