Analysts' Choice: Kroger Keeps Ringing Up Growth

9/5/2016


  Recent Price
$32
  Dividend
$0.48
  Yield
1.5%
  P/E Ratio
15
  Shares (millions)
966
  Long-Term Debt As % Of Capital
60%
  52-Week Price Range
$42.75 - $31.31

Entering 2016, Kroger ($32; KR) had given investors a smooth ride to higher returns, its stock up 152% since we first recommended the grocer in the April 1, 2013, issue. But lately Kroger has become the wobbly wheel in our grocery cart of Buy-rated stocks. None of our currently recommended stocks has fared worse this year than Kroger, which has fallen 23%.

Many of Kroger's Quadrix scores have also declined, pushing its Overall rank down to 80. But its Value rank has climbed to 83 from 42 at the end of December. And both sector-specific ranks are at least 85. Kroger is a Buy and a Long-Term Buy.

Low prices slow profit growth

The stock's weakness coincides with food prices, which declined in each of the past eight months. Including its pharmacy unit, Kroger said total price inflation in the April quarter was the weakest in six years. Executives expressed little confidence that pricing will improve much, if at all, for the remainder of the year. Management also cautioned that earnings per share may only reach the lower half of its full-year guidance of $2.19 to $2.28. The bottom half of that range implies 6% to 8% growth.

Kroger management blames softer food prices on trends in commodity markets, rather than competition. Rivals Target ($70; TGT) and Wal-Mart Stores ($71; WMT) corroborated those claims and also noted deflation while reporting July-quarter results. Encouragingly, analysts at Goldman Sachs ($169; GS) have not found a period of declining food prices that exceeded nine months since 1960, raising hope that prices may be bottoming out.

Kroger's volume growth has helped offset weaker prices. The company is gaining market share and seeing more frequent store visits by its customers. Kroger continues to expect same-store sales to rise 2.5% to 3.5% for the year ending January.

Annual sales have risen in 29 straight years, stretching all the way back to 1987, a period that included some extremely harsh conditions. Quarterly earnings per share and sales have declined just once since the beginning of 2011, and cash from operations has fallen in just five quarters during that period. All three metrics reached record highs in the 12 months ended April.

Conclusion

The stock looks attractively valued. The trailing P/E ratio of 15 lags its three-year median of 17.5 and industry median of 18.

Analyst estimates for Kroger have slipped over the past 90 days, though they have held up better than most of the other food retailers. When Kroger reports July-quarter results on Sept. 9, the consensus calls for earnings per share of $0.45, up 2%, on sales of $26.81 billion, up 5%. Kroger has exceeded the consensus profit estimate in each of the past 10 quarters but missed Wall Street's revenue target in four of the past five.

If the trailing P/E ratio returns to its three-year norm of 17.5 and Kroger merely meets the lowest full-year analyst profit estimate of $2.13, its shares will rally 17% by March.

An annual report for The Kroger Co. is available at 1014 Vine St., Cincinnati, OH 45202, (513) 762-4000, www.kroger.com.

KROGER
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Apr '16
0.70
vs.
0.62
5%
40.91
-
34.78
20 - 17
Jan '16
0.57
vs.
0.52
4%
42.75
-
36.00
21 - 18
Oct '15
0.43
vs.
0.35
0%
39.43
-
27.32
20 - 14
Jul '15
0.44
vs.
0.35
1%
39.34
-
34.05
21 - 19
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
109.83
2.06
0.40
42.75
-
27.32
21 - 13
2015
108.47
1.72
0.34
35.03
-
17.57
20 - 10
2014
98.38
1.43
0.31
21.92
-
13.77
15 - 10
2013
96.75
1.32
0.25
14.00
-
10.49
11 - 8
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
80
57
83
92
52
33
9

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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