Kroger Stock Is An Attractive Buy At Current Price Levels

• Kroger has outperformed its peers by delivering consistent sales and earnings growth in a very volatile retail sector.
• Kroger has shown eleven years of market share gains and fifty consecutive quarters of positive identical supermarket sales growth.
• The average target price of top analysts is at $38, an upside of 16.1% from its August 15 close price.

The Kroger Co. (NYSE:KR) has done very well in the last few years, gaining market share, demonstrating innovation, and showing impressive growth in revenue, earnings-per-share, and dividend. However, its stock price has fallen significantly since the start of the year, which, in my opinion, creates an excellent opportunity to buy Kroger stock at an attractive price.

Kroger has recorded substantial growth in the last few years. The company’s annual average sales growth over the last five years was 6.03%, and the average earnings-per-share growth was very high at 18.81%. Furthermore, the average dividend growth was very high at 15.16%, and the average annual estimated earnings-per-share growth for the next five years is also high at 9.23%. What’s more, the company has shown eleven years of gaining market share and fifty consecutive quarters of positive identical supermarket sales growth, and it has consolidated customer relationships through value pricing.

Since the beginning of the year, Kroger stock price is down 21.8% while the S&P 500 Index has increased 7.2%, and the Nasdaq Composite Index has gained 5.1%. However, since the beginning of 2012, Kroger’s stock has gained 170.3%. In this period, the S&P 500 Index has increased 74.2%, and the Nasdaq Composite Index has risen 102%. According to TipRanks, the average target price of top analysts is at $38, an upside of 16.1% from its August 15 close price, which appears reasonable, in my opinion.

Kroger 1-yr stock price returns

Source: Kroger stock price chart by amigobulls.com

Kroger First Quarter Results

On June 16, Kroger reported strong first quarter fiscal 2016 financial results, which beat EPS expectations by $0.01 (1.5%). First quarter revenue of $34.6 billion increased 4.6% year-over-year, in line with Street forecasts, while same-store sales of 2.4% topped analysts’ estimates. Last quarter was the eighth quarter in a row that Kroger beat earnings estimates, as shown in the table below.

 

In the last conference call, Chairman and CEO Rodney McMullen said:

“We are very pleased with a solid quarter during which we continued to strengthen our connection with customers and expand our ClickList offering to more customers in more markets. Fifty consecutive quarters of positive identical supermarket sales growth, excluding fuel, is extraordinary. Our associates work tirelessly to produce these consistently remarkable results. We’ve been through all kinds of business cycles during the last 50 quarters, and we’ve demonstrated time and again that regardless of the environment, you can count on Kroger to continue executing our strategy, investing in growth and creating value for our customers and shareholders.”

Fiscal 2016 Guidance

In its latest report, the company offered guidance for the full fiscal year 2016. Kroger confirmed its net earnings guidance range of $2.19 to $2.28 per diluted share for the year. According to the company, shareholder return will be further enhanced by a dividend which is expected to increase over time. Kroger also confirmed its identical supermarket sales growth guidance, excluding fuel, of approximately 2.5% to 3.5% for 2016.

Dividend and Share Repurchase

Kroger’s long-term financial strategy continues to be to use cash flow from operations to repurchase shares, fund its dividend, increase capital investments, and maintain its current investment grade debt rating. Kroger’s strong financial position allowed the company to repurchase $1.1 billion in common shares and to pay $397 million in dividends over the last four quarters

The annual dividend yield is at 1.47%, and the payout ratio is only 19.4%. The annual rate of dividend growth over the past three years was very high at 18.1%, and over the last five years, was also very high at 15.3%.

 

Source: company’s reports  *assuming same dividend rate for the year

Strategy

In October 2012, Kroger raised its long-term target for earnings-per-share growth to 8%-11% from a previous range of 6%-8%. Kroger has outperformed its peers by delivering consistent sales and earnings growth in a very volatile retail sector. The company is using strict data analysis to offer personalized promotions, recognizing the need to provide low and attractive prices, and efficiently conducting operations to achieve the price reductions that drive market share. In my view, Kroger will be able to support operating margins due to improved purchasing power. Sales of natural/organic products remain strong, and margins are healthy, and management believes that healthy eating remains a growing mainstream trend.

Kroger Valuation

Kroger’s valuation metrics are good, the trailing P/E is at 15.32, the forward P/E is very low at 13.52, and the price-to-sales ratio is extremely low at 0.28. Moreover, its Enterprise Value/EBITDA ratio is also very low at 7.23, the price to cash flow is low at 7.38, and the PEG ratio is at 1.58.

In addition, most of Kroger’s Efficiency, Growth Rates, and Return on Capital parameters have been much better than its industry median, its sector median, and the S&P 500 median as shown in the tables below.

Source: Portfolio123

Conclusion

Kroger has shown eleven years of gaining market share and fifty consecutive quarters of positive identical supermarket sales growth, and it has consolidated customer relationships through value pricing. The company has done very well in the last few years, gaining market share, demonstrating innovation, and showing impressive growth in revenue, earnings-per-share, and dividend. According to the company, shareholder return will be further enhanced by a dividend which is expected to increase over time. Kroger’s valuation metrics are good, the forward P/E is very low at 13.52, and the EV/EBITDA ratio is also very low at 7.23. The average target price of top analysts is at $38, an upside of 16.1% from its August 15 close price, which appears reasonable, in my opinion.