Key points
- Kroger shares rose after a solid report affirming its shareholder value.
- The stock is cheap and pays a solid dividend that is expected to grow.
- The merger with Albertsons may not happen, but it may not matter; Kroger is in its best shape in years and is ready to deliver results for shareholders.
- 5 Stocks We Like Better Than Kroger
Kröger NYSE: KR shares surged following fourth-quarter results and guidance, not because of eye-popping growth, but because this high-quality money-making machine has proven its worth. It is on track to deliver shareholder value with or without the merger with Albertsons Companies NYSE: ACI and it is cheap to buy. The stock trades at just 12 times earnings even with the post-release price action surge, yielding above 2.0% with a beta near 0.6 times the S&P 500 Index, making it a solid choice for risk-averse investors.
As for value, today the company is growing and delivering value to shareholders. The company has suspended stock buybacks to prepare for the merger with Albertsons, but continues to pay a dividend. The suspension of buybacks allowed the company to increase its cash balance, almost 3 times year-on-year and reduce financial leverage.
Debt is relatively flat on a year-over-year basis, but the adjusted net leverage-to-cash ratio has fallen to 1.33X, about half of the company’s target, setting it nicely. If the deal moves forward, the company would have already made progress against its projected debt load at closing. Otherwise, the company has ample capital and leverage capacity for above-average distribution growth and will resume share repurchases while maintaining its investment grade credit rating.
The merger with Albertsons is still underway, but it is further away than ever from concluding. The latest news is that the FTC is suing to block the deal and may be able to stop it. They consider it anti-competitive for the retail/grocery universe. The bottom line for investors is that Kroger may not buy Albertsons, which may be for the best. The company would become larger after the merger; Today he is better, in the best condition he has been in for years and getting stronger every day.
Kroger Has a Solid Quarter: Margins Shine
Kroger reported a solid fourth quarter, with revenue growth of 6.5% to $37.1 billion. Revenue beat consensus by just ten basis points thanks to strength in store count offset by a 0.8% decline in comps. Margin is the catalyst, with gross margin and costs increasing year over year but one offsetting the other, and net results well above consensus. Adjusted earnings of $1.34 were up 35% year-over-year, including a 13th week higher, and are still strong at $1.14 or up 15% when adjusted for hourly difference.
The guidance is lukewarm, but can be cautious. The company expects revenue growth of between 0.25% and 1.75%, with earnings between $4.30 and $4.50. This is lower than the analyst’s $4.56 consensus target, but enough to support the capital outlook. Among the reasons the guidelines may be cautious is the digital trend. Digital sales are a pillar of the growth strategy and grew at a 10% pace in the fourth quarter, led by an 18% increase in households that will provide leverage in 2024.
Analysts are warm to Kroger in 2024
Analyst activity at Kroger was light in the first quarter of 2024, including one review before the fourth quarter release and one after, but it was shareholder-friendly. The two include an upgrade to Equal Weight from Wells Fargo and a price target increase from Telsey Advisory Group after Kroger released the report. Telsey expects these shares to trade at $60, or about 1,000 basis points higher than now.
Price action in Kroger is also conducive to rising stock prices of this grocery stock. The stock rose 15% to confirm support at the bottom of its trading range and regain support above the long-term uptrend line. The uptrend stopped due to uncertainties, but has not come back into play, with the possibility of reaching new highs soon. The next critical resistance target is near $60 and could be reached before the summer. Risks include news about the ACI merger and consumer spending habits. However, Kroger is well positioned as consumers shift from discretionary products to daily and grocery products, its core sales category.
Before you consider Kroger, you’ll want to hear this.
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