Solid investment, with or without a merger

Albertson’s Companies NYSE: ACI proposed acquisition by Hooks NYSE: KR it may or may not pass, but it doesn’t matter. In any case, this stock has value that you don’t find every day for income investors. The stock trades well below its proposed acquisition price, analysts’ consensus target and its peers’ earnings multiple, suggesting there is nowhere to go but higher. If the merger goes through, investors will benefit from the higher price Kroger receives, and if not, stock prices will likely rise anyway and there is potential for increased dividends or other capital returns.

Albertson’s is cash flow generating and has plenty of room for a substantial dividend increase if the merger fails. The payout ratio is a low 22% of Q4 results and 18% of F2024 consensus estimates. The budget parameters are also healthy and give no reason to fear the security of distribution. Balance sheet highlights at the end of F2024 are a reduction in cash offset by accounts receivable, inventory, prepaid expenses, a slight decrease in debt, and a 70% increase in equity.

The latest news includes an updated merger deal and more stores being divested. To please regulators, the number of stores to be sold to C&S Wholesale Grocers increased by 166, or 40%, to 579. This will reduce Albertson’s store count by 25% but give C&S a competitive advantage while leaving unchanged the employees. We’ll see if that’s enough to derail the merger deal.

Albertson is stable after mixed results

Albertson’s had a mixed quarter, but results were in line with the outlook for value and distributions. The company reported revenue of $18.3 billion, unchanged from last year and far from the consensus reported by Marketbeat, but offset by market conditions, lower fuel sales and internal metrics. Store sales increased 1% and offset by a reduced number of stores. System-wide, digital sales increased 24% and help support margin strength despite the impact of lower-margin businesses. Pharmacy, one of the pillars of growth and a lower margin business, contributed significantly to the results.

Margin news is mixed but better than expected. The company’s GAAP margins expanded slightly, but were offset by a slight contraction in adjusted value. The net result is that GAAP EPS of $0.43 is down $0.11 from last year and adjusted EPS of $0.54 is down $0.25 but lower than expected. The contraction was partly due to an extraordinary event that occurred the previous year, but increased interest expenses and higher taxes also played a role.

Albertson’s is three times as much

Albertson’s value starts with the merger price. The merger price assumes a sale near $27.20, a price that could fall due to the new terms, but will not fall 35%. This is the discount offered by the current ACI share price. Analyst consensus has aggravated the value, which is falling but still stands at over 20% upside. We can assume that the price target from the analysis aligns more closely with the final deal.

As for the price-to-earnings multiple, the stock trades at 7 times earnings, several notches below Kroger, which trades closer to 13 times earnings; other major food retailers such as Go to the supermarket NASDAQ: GO AND Casey’s General Stores NASDAQ: CASY trade close to 24X. Albertson’s value is unlikely to quadruple, but there is value and potential for a double-digit upside.

Technical Outlook: Albertson’s is at rock bottom

Price action in Albertson is having traction issues following Q4 2023 results, but a deep decline is not expected. The market is at a critical support level which has provided solid support since the merger was announced. Assuming the market continues to buy stocks at this level, it should start to rebound soon and could move higher within its range. The top of the range is near $23.50, good for a 15% gain.

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