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Declining Revenues - Graham's Perspective?


prunes
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One thing that Ben Graham preaches throughout Security Analysis is the need to look beyond trailing earnings and short-term trends. Because the future, ultimately, is unpredictable to all of us, trends should not be relied upon to any great extent. Yet even on this board with its many Graham acolytes, I see a frequent aversion to companies with near-term declines in revenues even though industry outlook is relatively neutral. As as example, take SuperValu (SVU), which we have a thread about in the Investments category.

 

With SVU it is tough to compare TTM revenue with historicals beyond the past few years due to some major acquisitions (the financials don't break out performance by subsidiary/banner). Net income, however, shows a consistent increase over the past ten years.

 

http://i53.tinypic.com/245h3yq.png

 

Net income is shown with impairment charges added back. 5-year average income is $488 MM. 10-year average income is $370 MM. B

 

Because of the continuing declines from FY 2009, the share price continues to tank. But the 5- and 10-year averages show strong upside potential if/when income reverts to the mean. Graham probably wouldn't call SVU an intelligent investment because of its debt overhang, but I imagine that he would call it an intelligent speculation.

 

Am I perhaps misinterpreting what Graham says about the need to look beyond just the past two or three years in this particular circumstance?

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Am I perhaps misinterpreting what Graham says about the need to look beyond just the past two or three years in this particular circumstance?

 

Yes.

 

---

 

Debt has a funny way of making each and every quarter matter. If not quarter than at least the year.

 

SVU is the classic example of ....

 

While debt can provide incentives to ‘drive carefully,’ as we’ve seen with the success of many LBO firms, massive leverage is often akin to driving with a knife built into the steering wheel.  Sure, you’ll drive carefully, but watch out if you hit a bump in the road.  

 

The more I work at my company (fortune 500), the more I realize that companies are giant lumbering beasts. Few people really truly know whats going on on the inside and most outsiders have no clue. Behind all those pretty numbers on the income statement and balance sheet are a bunch of assumptions and moving parts. The trend points down, and the knife is on the dash. Its easy to say its overblown but is it really? You can assume things pick up but thats a bit optimistic to me. At best I would project the past forward at flat numbers. We also have a credible excuse for the declining earnings. Many think the stores are getting squeezed by inflation. Most think inflation will continue whether the CPI picks it up or not. You said eventually they can pass it on to the customer, but eventually is a long time if inflation keeps rising over the long term.

 

I think its a good bet / gamble. But that hair on the girls chin are real, its nice to just ignore it but it wont go away. They dont have much wiggle room and if they dont pay off that debt the SP will stay in the tank. The stock is going down because they are massively levered and have declining revenues. One of those is fine, but both scares the hell out of people. You would ideally only want to lever something up if it had very stable revenues. They bought on a bunch of debt, have made acquisitions, have written off the acquisitions, and have revenues which are declining. Thats why the stock is down.

 

As I told a coworker who invested in IRE, AIB, Circuit City - Sometimes when there is smoke there is a fire.

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Guest HarryLong

Wise man say: "Tread carefully."

 

Competition is so much more intense than in Graham's day. If the Big 3 think that Toyota is scary, just wait until the Koreans, Chinese, Indians, Vietnamese, etc come out with a $5,000 car. They will make Toyota look like Teddy Bear.

 

 

Wise man say: "Thou Shalt Not Sacrifice Quality for Price."

 

Enough said.

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The revenues will decline because they are selling off units and closing down ill-performing stores. As such, the revenue trend is downward, but it's a good thing they are 1) repaying high cost debt and/or 2) reinvesting in the high ROIC (Sav-A-Lot).

 

Declining revenue is bad, but if the company has been dissarray and bad investments -- the divesture/closure is the best strategy and the trend is to be expected.

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Schin: Spot on comments.

Sav-A-Lot is great format.

It's in the vein of Aldi, but the ship is not run as tightly.

The Albrecht family owns Aldi and also Trader Joe's, which Buffett has public salivated over, on numerous occasions.

Here's a short article about Aldi--originally ran in Bloomberg Magazine 2004.

http://www.businessweek.com/magazine/content/04_17/b3880010.htm

 

 

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