Latticework Investor

Value Investing

Winn Dixie – undervalued?

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Whitney Tilson appears to be a fan of Winn Dixie, the supermarket operator. His hedge fund T2 Partners owns 494,170 shares (see recent SEC 13-F filing) in the company, making it his fifth largest position.

Below is a excert from his letter to investors which outlines his investment thesis

Winn-Dixie operates 521 supermarkets, 70% in Florida and the rest in Alabama, Louisiana, Georgia and Mississippi. Thanks to poor management, run-down stores and fierce competition, the company, which had 1,000 stores at the time, filed for bankruptcy in early 2005. Having shed all of its debt and approximately half of its stores, Winn-Dixie emerged from bankruptcy in late 2006 under the leadership of Peter Lynch, who for the previous three years had been the President and COO of Albertsons, where he’d been in charge of operations, merchandising and marketing for the company’s 2,500 stores. While there, he had led a 200-store asset rationalization and $500 million expense reduction program.

During bankruptcy, Winn-Dixie shed its worst stores and is now investing in the remaining ones (it plans to remodel 75 annually until all of its stores have been remodeled), with good results so far: in the most recently reported quarter, gross margins rose, same-store comps at newly remodeled supermarkets were +11.6% and overall same store sales were +3.0%.

Winn-Dixie’s stock is remarkably cheap in our view. It has a market capitalization of around $860 million, but an enterprise value of $700 million after netting out cash of $162 million (the company has no debt, though it does have lease-related liabilities). That’s cheap for a company with more than $7.3 billion in revenues and projected EBITDA this year of $110-$125 million, even before factoring the value of the company’s $550 million net operating loss carryforward from the bankruptcy.

Even if one counts lease liabilities as debt, Winn-Dixie’s enterprise value is a mere 12% of sales, which is far below its peers.

Winn-Dixie has a much stronger balance sheet than these companies (all but these have 6 – 36x more debt than cash), but Winn-Dixie trades at a far lower EV/S multiple due to its lower margins.

If we thought Winn-Dixie’s margins had no room for improvement, then we wouldn’t own the stock at today’s price. However, we see no reason why, over the next couple of years, as Winn-Dixie continues to remodel stores and grow sales, its EBITDA margin won’t double (at which point, it would still be well below normal industry levels), which we believe will result in at least a doubling of the stock.

Eventually, we think Winn-Dixie will show sales and income growth to a point where it will be a nice acquisition for a company seeking to expand in the rapidly growing southeast region. There are probably three natural suitors.

Here is a link to the full letter:

View this document on Scribd

And a link to his article on Seeking Alpha

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Written by latticework01

June 10, 2009 at 2:27 pm

Posted in picks

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