Ruddick Corp (RDK)

So let me see if I've got this straight --- we have a well-run, growing corporation that operates one of the best managed grocery chains in the nation that has seen its earnings move steadily upwards over the past four years and yet, the stock price seems to have an inverse relationship to the performance? Hmmm ... something doesn't seem right.

I don't jump into grocers that often because I like to chase stocks with higher reward potential, but for a more "conservative" stock, this looks like a pretty damn good bet. Net tangible assets (NTA) alone for Ruddick are equal to $17 per share. Even if I take a few more discounts (like say $140 million worth) to be on the safe side, I come up with a $14.25 adjusted NTA per share figure. Not bad, eh?

But that's only the tip of the iceburg. Earnings have steadily grown over the years. In FY '06 Diluted Earnings Per Share (DEPS) were $1.52 per share. By FY '08, DEPS had grown to $2.00 per share. While RDK's FY '09 earnings have fallen a little bit, they still look to be in good shape. For the first three quarters of FY '09, they've earned $1.29 per share compared to $1.49 per share in the same period for FY '08.

Ok, so the most recent quarter was the roughest as they earned 34 cents (per diluted share) vs. 51 cents the prior year, but take a look a closer look at their income statement and you see that all of that drop can be attributed to a non-cash impairment charge. In actuality, they are earning almost exactly the same as they were last year. Once you take out the one-time charges, Earnings Before Taxes only fell from about 83 cents to 78 cents per share; after taxes, that translates to about a 3 cents per share difference.

Operating Cash Flows have been spectacular, as well. They have been free cash flow neutral, as they have been expanding rapidly and opening up new Harris Teeter stores. But that should also suggest that Ruddick may have a lot of growth in it still.

Another thing to consider; the biggest concentration of Harris Teeter stores are in North Carolina and they are headquartered in Charlotte. Charlotte right now has one of the worst unemployment rates in the nation, so it has suffered much more than the rest of the nation. For a grocer with a heavy NC concentration to perform as well as it has over the past year is pretty impressive.

As for valuations, if I go with a more conservative $14.25 NTA figure, a 9.5% cost of capital, and assume steady state earnings of $1.75 per share with 3% growth, I come up with a valuation of $40.50. And that may be somewhat conservative since I might be (a) over discounting their asset values, (b) understating their earnings, and (c) making too weak assumptions on growth. And yet, I still come up with a price about 67% higher than the current stock price.

In my more custom valuation, I came up with a value of $45. I think that's probably about right. Downside probable is $36. Upside probable is $50. But there is definitely some growth potential here, as well.

Personally, I love Harris Teeter. I shop there all the time. The prices are reasonable, the produce is fresh, they have spectacular bread, stores are always clean, and most of them are open 24 hours a day. This seems like a very good outperform pick under $25 to me. I'm not sure why the market is so down on it.