Growth Difficult for Nash Finch

We maintain our Hold rating on Nash Finch Co. (NAFC - Analyst Report) shares ahead of its second-quarter earnings report, which is scheduled for July 17. The company’s strategic initiatives and cost-cutting efforts are taking hold and producing better results. Another positive is that Nash Finch is using its free cash flow to pay down debt, buy back stock, and fund acquisitions. However, we believe these positives are already discounted in the shares.

Nash Finch competes in the mature, slow-growth food business, an industry challenged by limited opportunities for revenue growth and fierce competition. Thus, companies in this industry grow their revenue by gaining market share, achieved through price cuts or acquisitions.

While the company is targeting 2 percent organic growth over the long term, we think that Nash Finch will have a difficult time reaching that goal without a big improvement from its retail stores. Unfortunately, the biggest improvements in retail business have been its store closings which the company cannot keep on doing. Also, we believe Nash Finch has already grabbed most of the low hanging fruit, and future cost-cutting efforts will result in smaller gains.

Nash Finch shares are trading at 12.1x our 2008 earnings estimate and 10.7x our 2009 earnings estimate. NAFC trades in trades at a discount to its peers, which is reasonable given Nash Finch’s lower expected earnings growth. We believe the stock is fully valued but should keep pace with the market over the next six months. We reiterate our Hold rating. Our target price is $38, or about 11x our 2009 EPS estimate.

Read the full analyst report on NAFC