Special Situation Ideas for week of 14-September-15

Supervalu (SVU) operates wholesale and retail grocery businesses. SVU has cut costs, reduced its debt, shaken up management, and sold all of the Albertsons stores it acquired in 2006. Additionally, what can be a positive is a potential spin-off. SVU said in July that it is considering a move to spin off Save-A-Lot, the company’s deep-discount supermarket chain. Separating the discounter would enable SVU to focus on its food-distribution business, which serves about 1,800 stores and accounted for nearly half of last year’s $17.8 billion in revenue. The stock fell about 7.5% last week on news that the West Coast supermarket operator Haggen, one of the company’s newer wholesale customers, had filed for bankruptcy protection in addition to comments by the CEO that SVU is seeing price deflation. An investor believes that Save-A-Lot could generate $ 220m in in EBITDA and can be valued at 10x FY16 EBITDA, or $2.2bn, about equal to Supervalu’s total market capitalization. Save-A-Lot, which owns and operates 431 stores and licenses 903, accounted for 26% of SVU’s revenue last year. SVU’s troubles stated when it jointly bid for $17.4bn Albertsons deal, in which SVU took 1,100 grocery stores and $ 6.1bn of debt. This was followd by the financial crises. SVU  sold 877 Albertsons stores the following year to an affiliate of Cerberus for $100 million in cash and the assumption of $3.2 billion of debt. SVU has cut its debt to $2.2bn from $5.9bn in FY12. It has won back wholesale customers and attracted new ones with better pricing. It’s remodeling 20% of its retail stores annually, adding private-label, organic, and pet- and baby-food offerings, and upgrading its digital platform. Shares could reach $12, more than 40% to 50% above its trading price.

Quanta Services (PWR) is a is a provider of specialty contracting services, offering infrastructure solutions primarily to the electric power, and natural gas and oil pipeline industries. PWR has three major divisions: electric power, Oil & Gas and Fiber Optic. The shares have fallen 14% since the end of 2014. Some of the reasons for the drop are obvious: Quanta is an engineering company that helps energy and power companies with their infrastructure needs, and exposure to energy is a mite unpopular right now. Quanta also has been hurt by bad weather, which forced it to cut annual profit guidance. And, new contracts have been slower to come in than the company had expected. There are certain catalysts in here that require close attention. One of them was the pending divestiture of its Fiber business. On 30-Apr-15, PWR announced the sale of its Fiber business to Crown Castle for USD 1bn. The company will use majority of the cash to buy back its shares. Contrary to popular belief, the Oil & Gas business of PWR is majorly exposed to the natural gas market. This market should benefit as more and more utilities are pushed to use natural gas as a result of changes in regulatory environment. Furthermore, gas exports are expected to increase after 4Q15, which in our opinion will lead to higher demand for capacity resulting in the need to maintain and to build more pipelines in order to transport gas to the export terminals. In addition to pipelines within US, there has been ongoing talk about building pipelines from Canada to the US Gulf Coast. These negotiations have been in limbo for couple of years that we believe should be favorably resolved in late FY16, after the presidential elections take place. In addition to the disposal and higher demand for natural gas infrastructure, there seems to be an urgent need to construct, maintain and upgrade the US power electric grid, where PWR plays a major role. Except for the share buybacks, PWR does not have any immediate catalysts. PWR trades at 10.6x adjusted Fy16 earnings forecasts—below the group’s 12.2 multiple. In the past, PWR, according to my own analysis can go as high as USD 35 per share.