Renowned retailer The Kroger Co. (KR) operates combination food and drug stores, multi-department stores, marketplace stores, and price impact warehouses.
On October 14, KR and Albertsons Companies, Inc. (ACI) announced entering into a definitive merger agreement to form a behemoth. The combined company will likely generate more than $200 billion in annual revenue and serve 85 million households.
According to the merger agreement, KR would acquire outstanding shares of ACI common and preferred stock for an estimated total consideration of $34.10 per share. The transaction is expected to close in early 2024, subject to the receipt of required regulatory clearance and other customary closing conditions.
While unionized retail workers are lobbying regulators and lawmakers to stop the merger, the deal has the potential to significantly drive the company’s growth.
Moreover, the company’s forward annual dividend of $1.04 per share yields 2.32% on the current price. Also, the company’s dividends have grown at a 12.9% CAGR over the past five years.
KR’s stock has gained 11% over the past year and 4.2% over the past five days to close its last trading session at $44.77.
Here are the factors that could influence KR’s performance in the near term:
Solid Financials
For the fiscal second quarter of 2022, KR’s sales increased 9.3% year-over-year to $34.64 billion. Operating profit rose 13.7% from the prior-year quarter to $954 million. Its adjusted EPS came in at $0.90, up 12.5% from the same period the prior year.
Strong Growth Story
KR’s revenue has grown at a 5.9% CAGR over the past three years and a 4.1% CAGR over the past five years. Its net income and EPS have grown at 14.1% and 17.6% CAGRs over the past three years, respectively. Its levered FCF has increased at a 42.8% CAGR over the same period.
Cheap Valuation
In terms of its forward non-GAAP PEG, KR is trading at 0.84x, 66.3% lower than the industry average of 2.49x. The stock’s forward EV/Sales multiple of 0.34 is 79.3% lower than the industry average of 1.65. In terms of its forward Price/Sales, it is trading at 0.21x, 82.2% lower than the industry average of 1.19x.
Favorable Analyst Expectations
The consensus EPS estimate of $0.81 for the fiscal quarter ending October 2022 indicates a 3.8% year-over-year increase. Likewise, analysts expect its EPS to improve 10.6% from the prior year to $4.07 in the current year (fiscal 2023).
Street revenue estimate for the current year of $148.24 billion indicates a rise of 7.5% from the prior year. Moreover, KR’s EPS is expected to increase 11.7% per annum over the next five years.
POWR Ratings Reflect Promising Prospects
KR’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. KR has a Growth grade of B, in sync with its strong growth story. It also has a B grade for Value, consistent with its lower-than-industry valuation.
In the 38-stock Grocery/Big Box Retailers industry, it is ranked #9. The industry is rated A.
Click here to see the additional POWR Ratings for KR (Momentum, Stability, Sentiment, and Quality).
View all the top stocks in the Grocery/Big Box Retailers industry here.
Bottom Line
KR’s almost $25 billion merger with ACI should provide the benefits of scale. The company’s solid long-term growth prospects, the defensive nature of the business, and its steady dividend growth make the stock an attractive pick now.
How Does The Kroger Co. (KR) Stack Up Against its Peers?
While KR has an overall POWR Rating of A, one might consider looking at its industry peers, Ingles Markets, Incorporated (IMKTA) and Village Super Market, Inc. (VLGEA), which also have an overall A (Strong Buy) rating.
KR shares were trading at $45.78 per share on Wednesday afternoon, up $1.01 (+2.26%). Year-to-date, KR has gained 2.57%, versus a -17.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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