Kroger Inc. (NYSE:KR) is a $36,142 million market cap that was recently upgraded. Analysts at Deutsche Bank have raised the rating of the company to Buy. Further, they have raised the price target to $45.
Institutional ownership
RR Partners LP has the biggest stake with 4.73 million shares or 12.69% of shares outstanding. First National Bank Of Hutchinson is another bullish fund with 299,726 shares of Kroger, or a 7.44% stake. Also, Kynikos Associates LP has a 3.97% stake with 124,851 shares.Â
Hedge fund ownership
First Eagle Investment (Trades, Portfolio) holds 222,000 shares valued at $8.1 million. Ken Fisher (Trades, Portfolio) is the largest shareholder with 479,248 shares valued at $17.6 million.
Business overview
Kroger's second quarter was strong. While many other competitors are limping along, Kroger once again beat both the top and bottom lines. The company saw revenues of $25.5 billion, which was up 1% year over year and beat the consensus estimate by $40 million. I will add that these sales would have been much higher if it weren't for weakness in fuel prices.Â
The bottom line performance was even more impressive. Net earnings came in at 35 cents per diluted share. If we back out fuel, earnings came in at 44 cents per share, which beat the consensus estimates by 4 cents. The company's supermarket strength is striking. Its same-store supermarket sales growth was 5.3% year over year (excluding fuel). Many of the competitors in this sector tend to see slower growth of 1% to 3% year over year for same-store sales.
Strong growth potential
According to the management, the business is expanding and there are the key areas of innovation:
1)Â Technology: For Kroger, digital doesn’t limit them up to the e-commerce platform. This summer, they expanded their online ordering pilot in Cincinnati to three additional divisions. They are now offering order online and pickup in select Kroger stores in Louisville, Indianapolis and Fred Meyer stores in the Portland area. This is in addition to the Harris Teeter's successful express lane service.Â
2)Â HEMISFARES Food: The food retail business is in a constant state of change. Later this month, Kroger will launch an entirely new brand called HEMISFARES. HEMISFARES brings only the best food finds from around the globe. According to the management, it’s a guide tour of the best tastes on the earth, and this makes their brand unique.
The management doesn’t provide guidance for the sales because of the unpredictable impact that fuel has on overall results. But they are working on opening some new stores in 2016 to cope with the demand from customers. Currently the stock is trading at $36.73; however, Market Watch Finance estimates a target price of $41.25, which represents a 15% upside potential. The trailing 12-month dividend yield stands at 1.14%, which is consistently higher since 2006, but still it ranked lower than 84% of the 446 companies in the grocery stores industry.
Valuation
Regarding to its valuation metrics, the stock is undervalued. In terms of valuation, the stock sells at a trailing P/E ratio of 18.89, trading at a discount compared to a median of 22.71 for the industry. To use another metric, its P/S ratio of 0.33 is below the industry median of 0.54
