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On March 7th, Kroger Co. (KR) will announce their fiscal Q4 earnings. Data from Kroger's past and present both give reasons to be optimistic about the firm's growth prospects over the next year.

PAST

Over the last 6 quarters, KR has grown earnings steadily. Below is a table of the last 6 quarters of results. I'm using KR's fiscal year, not calendar quarters (all data from thestreet.com):

Quarter Estimate Actual Beat/Miss Previous Year
Q3 2012 $0.43 $0.46 $0.03 $0.33
Q2 2012 $0.49 $0.51 $0.02 $0.41
Q1 2012 $0.72 $0.78 $0.06 $0.70
Q4 2011 $0.49 $0.50 $0.01 $0.46
Q3 2011 $0.32 $0.33 $0.01 $0.32
Q2 2011 $0.43 $0.41 ($0.02) $0.41

As you can see, KR has beaten expectations 5 straight quarters, and earnings has really picked up- better than 10% for three straight quarters, and about 30% last quarter. While this type of performance can't last forever, I'm expecting it to continue for at least another year.

PRESENT

At about 21x earnings, Kroger is reasonably valued but not excessively so. As you can see from the below chart, KR's valuation puts it only slightly above the average for the S&P 500 (all data from Google, charts created by author):


(Click to enlarge)

Even compared to other Consumer Staples Stocks, KR doesn't look overvalued, and doesn't trade at the premium it deserves


(Click to enlarge)

FUTURE

RISKS

I see KR as a buy, but there are some risks. As a grocery chain, the company's earnings growth will be counter-cyclical to the consumer cycle. So if the U.S. consumer starts to show a lot of strength, don't expect this stock to participate. However, I don't think the scars from the downturn are gone yet: consumers will continue to be conservative with their purchases, and that's good for KR.

A bigger worry is the possibility of multiple compression. Many other stocks in related categories, like CVS (NYSE:CVS) trade at lower levels. But I think that the history of earnings growth and strong market position justify KR's valuation. Furthermore, because of KR's countercyclical nature, the company should be partially protected from a market-wide downturn.

REWARD

As a strong brand in a stable industry, KR should be trading up where more premium consumer staples trade. Costco (NASDAQ:COST) and Brown-Forman (NYSE:BF.B) both trade at valuations 15% higher, and that's where I expect KR to be. Add in 15% earnings growth, and I am targeting about $40 for the stock during this year.

Source: Buy Kroger Ahead Of Fiscal Q4 Earnings