Why Kroger Should Be on Your Shopping List

KR reported second quarter results that were stellar. Sales were up 3.5% (excluding fuel sales), earnings of 39 cents beat expectations by two cents and gross profit margin increased 59 basis points to 23.11%. In addition, debt was pared down $200 million and nearly 3 million shares were repurchased in the open market (there are still 425 million shares remaining for purchase.)

The trouble was, KR ratcheted down its fiscal 2009 guidance to the $1.90 to $2.00 range which spooked the Street -sending the shares down as much as 10%. I expect management is playing the conservative side on guidance and is certainly posturing a under promise-over deliver mentality.

Things are looking up: KR recently increased its dividend 5%,resulting in an respective 1.8% yield. S&P just upgraded KR’s debt to BBB status, justifying the action by claiming KR’s pricing power is gaining traction. Adding the “cherry on top” was Janney Montgomery Scott ‘s decision to include KR to its research coverage with a Buy rating.

The Cramer Factor: Jim Cramer (the guy is pure genius and quite an entertainer - but a contrarian indicator) recently said to stay away from KR and buy WFMI. I think the opposite should occur because Cramer tends to buy high and sell low. For example: WFMI sells at 40 times estimated earnings while carries a meager multiple of only 11. Cramer likes the expensive, momentum ”flavor of the month” plays, versus the boring safe investments. Should WFMI have a multiple four times higher than KR? Certainly not. If WFMI was expected to show earnings growth at four times KR’s rate, I could see the possibility, but WFMI expected earnings growth of 23% is not that much higher than KR’s 10%. In my opinion WFMI is overvalued and KR is undervalued.

Bottom-line: KR’s risk reward scenario is compelling. Its downside risk is no greater than $2 while its upside potential is five times that. KR is a safe, defensive stock carrying a decent dividend yield that has not become bloated in price during the last six months of over exuberance in the markets. It deserves a second look by value investors seeking a place to park their money.