KR is a stock that you shouldn’t ignore

November 27, 2018

KR is a stock that you shouldn’t ignore

With market uncertainty increasing, it’s natural to wonder what kind of stocks make the most sense to pay attention to. How do you keep your eyes out for decent opportunities to make your money working for you when the market looks like it could be at a tipping point and broad market is increasing? I think a good approach is to look for conservative opportunities that offer a lower amount of risk than trying to find the next high flyer. That means focusing your attention on segments of the market that should see stable revenue flows, with relatively consistent profit levels even if the economy does in fact reverse and turn bearish.

One of the areas I really like to work with in these kinds of conditions is Consumer Staples. Food stocks make a lot of sense to me, because even when the economy struggles, consumers are still going to need to put food on their tables. Grocery stores like The Kroger Co. (KR) offer a similar kind of profile.

KR is an interesting company; they tend to get marginalized a little bit because of competitive pressure from bigger competitors like Walmart (WMT), Target Stores (TGT) and even Amazon (AMZN), but this is a company that has shown a consistent ability over the years to survive and successfully transform itself to stay relevant and maintain its presence. They also don’t mind taking calculated risks by setting their sights on new business streams that they think offer a good opportunity to expand their business. An interesting example of this is the company’s recent introduction of Bromley’s for Men, a line of men’s grooming products, including razors, shaving cream, lotion and face cleansers. It’s a clear play to take a page from stocks that help to stock the store’s shelves, like Proctor & Gamble’s (PG) Gillette brand as well as the shaving clubs that have been seeing an increase in popularity.



Fundamental and Value Profile

The Kroger Co. (KR) manufactures and processes food for sale in its supermarkets. The Company operates supermarkets, multi-department stores, jewelry stores and convenience stores throughout the United States. As of February 3, 2018, it had operated approximately 3,900 owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses and food production plants through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. As of February 3, 2018, Kroger operated, either directly or through its subsidiaries, 2,782 supermarkets under a range of local banner names, of which 2,268 had pharmacies and 1,489 had fuel centers. As of February 3, 2018, the Company offered ClickList and Harris Teeter ExpressLane, personalized, order online, pick up at the store services at 1,056 of its supermarkets. P$$T, Check This Out and Heritage Farm are the three brands. Its other brands include Simple Truth and Simple Truth Organic. KR has a market cap of $23.6 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings increased by about 5%, while sales were mostly flat, increasing about 1%. In the last quarter, earnings and sales both declined, a fact that has been one of the biggest catalysts for the market to push the stock down off of its recent highs. Management attributed most of that decline to costly store redesign efforts the company has been engaged in for a large percentage of its stores nationwide, but that has been largely completed and that management expects will translate to better bottom-line improvement in the quarters ahead. The company operates with narrow margins, as Net Income was about 3% of Revenues for the last twelve months. This number dropped in the most recent quarter to 1.8%.
  • Free Cash Flow: KR’s free cash flow is healthy, at about $685 million. That translates to a free cash flow yield of less than 5%, but remains adequate. The company has good liquidity, with $1.3 billion in cash and liquid assets, a number that declined from the last quarter but still remains healthy.
  • Debt to Equity: KR has a debt/equity ratio of 1.65. This is higher than I usually prefer to see, but isn’t unusual for Food Retailing stocks. The company’s balance sheet indicates that operating profits are more than adequate to repay their debt. It is also noteworthy that this number dropped in the last quarter from 1.74.
  • Dividend: KR pays an annual dividend of $.56 per share, which translates to a yield of about 1.86% at the stock’s current price. This is roughly inline with the industry average, but a bit below the S&P 500 average of 2.0%.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for KR is $9.21 per share. At KR’s current price, that translates to a Price/Book ratio of 3.22 at the stock’s current price. The industry average is 3.2, and the stock’s historical average is 5.06. A rally to par with the historical average would put the stock above $46 per share. That provides a long-term target price near to the stock’s 2-year high point in early 2016 and serves as a nice reference for the stock’s value opportunity.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: After rebounding from a pivot low in early October at around $27, the stock peaked early this month at around $32 before dropping back to its current range. It looks like it could be hitting another pivot low right now, with a bounce right off of support a little below $30. A push above $33 per share would mark a break above the range the stock has held since September, and could signal a longer upward trend could be building. The stock’s strongest support right now is around $27; a drop below that point could see the stock drop back into the low $20 range it saw earlier in the year.
  • Near-term Keys: If you don’t mind being aggressive, and little bit speculative, there could be an opportunity to buy the stock or work with call options right now, with an eye on the $33 range as a near-term profit target. If the stock breaks down below its immediate support at $29, you could also consider shorting the stock or buying put options with a target low around $27. I think the best opportunity, however lies in the long-term value potential the stock offers, with a pretty conservative profile that I think makes it more conservative, defensive-oriented stock to work with right now.