Sunday, January 23, 2011

Ahold Outperforms Again in 4Q, but Stock Offers Little Upside; Carrefour, Delhaize Better Values

Ahold slightly undershot our revenue forecast in the fourth quarter, but robust same-store sales figures give us confidence in our 2011 projections and suggest our thesis--that Ahold's shrewd capital allocation should allow it to outperform its peers in the near term--remains intact. We are reiterating our fair value estimate, which implies limited upside to the stock.

After adjusting for exchange rates and an extra week in 2009, fourth-quarter 2010 net sales increased 5.5%. The company's domestic market of the Netherlands together with the Czech Republic and Slovakia were the key drivers, with identical sales growing 4.0% in these markets. The U.S. segment, which represented 80% of total net sales in the fourth quarter, was slightly less positive, with identical sales up 1.9%, or 0.9% excluding gasoline. 

Customers around the globe are still focusing on value, and this is particularly true in the United States, where consumers have historically been sensitive to price promotions. This is likely to continue in the near term, and we think rising gas prices will put further pressure on consumers in the first half of 2011. Nevertheless, Ahold posted stronger sales growth than many of its peers; for example, Supervalu recently reported a 4.9% decline in same-store sales because of lower traffic. We think Ahold's investments in its stores, move to an everyday low price strategy, and focus on private-label brands are the key drivers of its outperformance.

In Europe, we expect Ahold's presence in the Netherlands and Eastern Europe will help the firm avoid much of the carnage being caused by painful austerity measures. The Netherlands' recovery appears to be broad-based, leading to a steady, if not spectacular, rebound from the recession. The European Commission forecasts around 1.5% and 3.0% real GDP growth for the Netherlands and Slovakia, respectively, in 2011; if these numbers come to fruition, Ahold should benefit from growing ticket values, while traffic should be supported by the continued relevance of private label.

However, at almost 12 times our forecast of 2011 earnings and 5.3 times forward EV/EBITDA, Ahold is roughly fairly valued, in our view. For investment opportunities in the European supermarket industry, we recommend investors look to Carrefour, where we think early signs of a stabilization in France could provide a near-term catalyst for the stock. In addition, we think that Delhaize, at 10.4 times 2011 earnings and 5.1 times EV/EBITDA, offers around 20% upside, as the Food Lion chain could regain share if the U.S. economy stumbles later in the year.

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