<p>Kroger (NYSE: KR) is in a rare company. Among stocks with a market capitalization of more than $ 10 billion, only about 12% have risen so far in 2020. Less than 5% have surpassed the Kroger share, which has gained a healthy 5.6%.
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It is tempting to chalk up the gains to the new coronavirus pandemic. Consumers have stored on the essentials before orders on the spot. and that trend has given a big short-term boost to Kroger sales.
But the 2020 gains have more than just a short-term boost. And there is also more in the long-term case.
This is one of the country’s best companies. Even after the gains, the KR share still looks cheap. It actually looks too cheap. And that is just one of the reasons why the Kroger share should continue to accumulate.
Hooks get a boost
On Wednesday, Kroger provided a business update for investors. The company noted “strong sales” in February, the first month of the 2020 financial year. But March was much more impressive.
According to the edition, sales in the same store excluding fuel increased by a staggering 30%. As a result, Kroger expects adjusted earnings per share (EPS) growth during the first quarter to be better than the original full-year view. This guide suggested an increase of FY20 by 5-10% compared to the previous year.
Investors may even see that guidance as conservative. It may be, but it is worth considering two important factors.
First, Krogers’ costs also rise. The company provides a “hero bonus” of $ 2 per hour to its frontline employees per hour. Increased sanitation and installation of safety measures such as plexiglass walls will also increase costs.
Of course, Kroger’s results for the first quarter will look good. However, revenue is unlikely to grow at the same rate as sales, given higher costs.
Second, a short-term boost does not make KR shares a purchase. This is true for all stocks. In fact, I have made that argument to express caution against “pandemic games” like Lakeland Industries (NASDAQ: LAKE) and Alpha Pro Tech (NYSEAMERICAN: APT) which have seen huge gains.
Demand will add a little extra money to Kroger’s balance sheet. It helps, but does not make Kroger shares a purchase. However, the figures in March show that an important risk is not what investors thought.
Competition about Kroger
The KR share has not exactly set the world on fire in recent years. The stock entered 2020 at the same levels as it traded at the end of 2014.
An important reason for this has been competition. Walmart (NYSE: WMT) has improved its performance and spent heavily on omnichannel retail and food delivery and retrieval. At the same time, Target (NYSE: TGT) has also turned.
In addition, the cheap German operators Aldi and Lidl have expanded throughout the country. And while competition in the industry is always intense, Kroger has more and better competitors out there now.
It is a cap on the multiple allotted to the KR share. Free cash flow has actually increased over the past six years, as has adjusted EBITDA. Still, investors have paid less for these revenues – at least in part because of fear of competition.
What the latest results show, however, is that Kroger is holding on. It’s not just the 30% increase in the same store sales in March either. Sales in the same store excluding fuel (fuel revenues are significantly affected by petrol prices) increased by 2% during the 2019 financial year.
Overall, Kroger competes hard in a tough space. And while it does not exactly dominate competitors, it does at least drive growth. However, this growth does not seem to be reflected in the KR share price.
The KR share looks good
When Kroger updated its sales trends for February and March, Kroger confirmed this year’s adjusted earnings per share for $ 2.20 to $ 2.40 for the full year.
At the midpoint of this range, EPS would increase by about 7.5%. But the Kroger share is traded less than 14 times the midpoint of that guidance.
This multiple does not seem to reflect the company’s growth profile – even excluding short-term bounces. As the latest results show, KR is a defensive stock, whose results can and will hold up even in a recession. Profits are still growing, but the valuation assigned to the KR share treats its future growth close to zero.
That’s not what’s happening now. This is also not what happened during a particularly strong fourth quarter, where adjusted earnings increased by 19% compared with the previous year.
Even the annual rally does not seem to contain that growth. Kroger is still one of the cheapest major stocks out there. Its business is clearly built for virtually any environment, and it matches the efforts of the big rivals in delivery and collection.
With that said, it is the combination that forms the basis for the long-term fall for KR shares. That case looks good and will remain so even as this crisis passes.
Matthew McCall left Wall Street to actually help investors – by getting them into the world’s biggest, most revolutionary trends FOR anyone else. The power of being “first” gave Matt readers the chance to bank + 2,438% in Stamps.com (STMP), + 1,523% in Ulta Beauty (ULTA) and + 1,044% in Tesla (TSLA), just to name a few . Click here to see what Matt has up his sleeve now. Matt does not directly own the above-mentioned securities.