Description

Overview:

The Arden Group (ARDNA) operates 18 supermarkets in the Southern California area. 16 are under the name “Gelson’s” and 2 are under the “Mayfair” name. These stores target a slightly more upscale clientele than your average supermarket, offering an abundance of fresh foods as well as prepared ready to eat meals.


Current Valuation:

Price: $59.99
Shares Out.: 3.36 MM
Market Value: $201.6
Net Debt: $53.7
Enterprise Value: $148.0

LTM EPS: $4.07
LTM EBIT: $21.1
LTM EBITDA: $29.4
LTM FCF: $16.8

P / LTM EPS (ex. Cash): 11.8x
EV / LTM EBIT: 7.0x
EV / LTM EBITDA: 5.0x
MV / LTM FCF (ex. Cash): 8.8x


Investment Thesis:

1)

Compelling Valuation:

- If you exclude the large cash position and corresponding interest income
on the b/s, ARDNA is trading at a very reasonable 11.8x LTM EPS and 7.0x
LTM EBIT.

- ARDNA has consistently showed an ability to return value to
shareholders, having compounded EPS growth at 21% from 1994 to 2001.

2)

Shareholder friendly management team:

- Over the past five years ARDNA has consistently generated higher than
40% ROIC (EBIT/tangible invested capital).

- When not allocating capital to new store openings ARDNA has consistently
reduced the share count through share buybacks. In fact ARDNA has
reduced its share count from 5.26 MM in 1994 to 3.4 MM as of the latest
Q.

3)

Margin of Safety:

- With cash and investments of over $53 MM on its balance sheet ARDNA has
the financial strength to weather any reasonable economic downturn.

- ARDNA has $8 MM of land on books. I believe this drastically understates
the value since it is recorded at cost and was acquired some time ago in
Southern California. I have tried to estimate this but the company just
doesn’t talk much. However, I think it is fair to assume it is worth
much more than $8 MM and offers further downside protection.

4)

Large Inside owner:

- Bernard Briskin the current CEO owns about 31% of the class A shares and
about 100% of the class B shares.

- There has been very little insider sales over the past decade.

- Mr. Briskin is obviously aligned with our interest due to his large
ownership stake.

- I think there is a real possibility for the company to be sold or be
taken private in the next 5 years due to the CEO being 77 years old.

Main Risks:

1) Wal Mart moving aggressively into ARDNA’s markets.
2) Bad economy.
3) Low float may make it difficult to get appropriate valuation.

Catalyst

1) Company is sold.
2) Value is recognized.