Two months ago, I wrote about The Kroger Company (KR) and predicted the stock was set to reverse its long-term downward trend in a big way. I’m generally not the type of person to pay myself on the back when something like that works out in my favor, but since the stock was below $25 then, and as of this writing is surging above $30 – that’s more than 20% in two months, if you’re keeping track – I feel pretty good about that prediction.
The other, more important reason that it seems like a good time to revisit this stock is because in spite of this nice, big rally, the stock is still undervalued. That’s pretty remarkable considering how far the stock has already moved, but it means that there is still plenty of good opportunity to work with a stock with some really terrific fundamental strength behind it and a management team that is actively working to stay competitive with bigger companies like Amazon.com (AMZN), Target Stores (TGT) and Walmart (WMT). Those are also stocks that get a lot more buzz in the media but whose value proposition is significantly less compelling. I still think that if you’re looking for a way to invest in the stock market defensively using the Consumer Staples sector, KR is one of the best plays available.
The Kroger Company (KR) is one of the most well-established, nationwide names in the grocery business, and they’ve held up well for decades even as companies like WMT and AMZN have pushed their way in and changed the competitive landscape of their industry. Not only am I willing to bet there is a Kroger-owned grocery store close to where you live, I’m also going to go out on a limb and say that you probably visit that store a handful of times every month at least. That is the kind of “stickiness” that analysts like to point to when they look for companies that will generally hold up in a troubled economy.
This is a company that has faced challenges from competitors large and small and manages to find its own way to not merely survive, but remain competitive and relevant. In just the last month, I’ve watched the company announce moves that should be useful to that end. Perhaps the most noteworthy just crossed newswires this morning, as the company is expanding its delivery portfolio. They already offered online order pickup and delivery from almost half of its stores nationwide via its Clicklist service, but is now adding the ability to ship home essential and non-perishable items at a lower cost using its Kroger Ship service. This is a non-subscription-based service, priced at $4.99 for two-day shipping on orders under $35, and free for orders above that minimum. It’s clearly designed to compete favorably with Amazon’s Prime Pantry service (which charges a higher delivery fee and requires an active Prime membership), and Target’s Restock service (next day delivery, free if you pay with a Target credit or debit card). The service is rolling out initially in four markets (Cincinnati, Houston, Louisville, and Nashville), with plans to expand to other markets in the next few months.
Fundamental and Value Profile
The Kroger Co. (Kroger) manufactures and processes food for sale in its supermarkets. The Company operates supermarkets, multi-department stores, jewelry stores and convenience stores throughout the United States. As of February 3, 2018, it had operated approximately 3,900 owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses and food production plants through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. As of February 3, 2018, Kroger operated, either directly or through its subsidiaries, 2,782 supermarkets under a range of local banner names, of which 2,268 had pharmacies and 1,489 had fuel centers. As of February 3, 2018, the Company offered ClickList and Harris Teeter ExpressLane, personalized, order online, pick up at the store services at 1,056 of its supermarkets. P$$T, Check This Out and Heritage Farm are the three brands. Its other brands include Simple Truth and Simple Truth Organic. KR has a current market cap of $24.1 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 26%, while sales increased at a modest rate of about 3.5%. The story is a little different, but not in a bad way in the most recent quarter, as KR saw an earnings improvement of 16% against an improvement of almost 21% in sales. The company operates with narrow margins, as Net Income was about 2.9% of Revenues for the last twelve months. This number improved in the most recent quarter to 5.39%.
- Free Cash Flow: KR’s free cash flow is healthy, at about $824 million. That translates to a free cash flow yield of less than 5%, but remains adequate. The company has good liquidity, with $1.7 billion in cash and liquid assets.
- Debt to Equity: the company’s debt to equity ratio is 1.74, which is a fairly high number under most circumstances, but which is also roughly inline with the industry average.
- Dividend: KR pays an annual dividend of $.56 per share, which translates to an annual yield of 1.85% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods uses the stock’s Book Value, which for KR is $8.54 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.54. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Food & Staples Retailing industry’s average is 3.1, putting KR bit above its counterparts. The stock’s historical Price/Book Ratio, however is 5.06, significantly above its current level. The stock would have to rally to about $43 per share to reach par with its historical average. That provides a long-term target price near to the stock’s 2-year high point in early 2016 and serves as a nice reference for the stock’s value opportunity.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The stock appears to be breaking resistance at around $29.50, defined mostly by the trading range it held from early June until late July. Prior to that point, the stock had held in a range between $23 and $26 per share. The break above that range in early June confirmed a long-term downward trend reversal that had extended back to the beginning of 2016. The stock’s next most likely resistance level, based on previous pivots, is in the $33 to $35 price area, with support at the latest breakout level between $29.50 and $30 per share.
- Near-term Keys: If you’re looking for a good long-term, value-oriented play, the stock remains an excellent bargain, so there is little reason not to take advantage right now. The stock is only about $1 away from its 52-week high at around $31.50, so if you’re looking for a shorter-term bullish trade using swing or trend strategies, you should probably wait until the stock breaks above that level, with a short-term target price around $35. If the stock breaks down below $30, it could see room to drop to between $26 and $27 fairly quickly, which could offer an attractive bearish setup using put options or by shorting the stock.