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Company Profile: The Kroger Co. (KR), together with its subsidiaries, operates as a retailer in the United States. The company also manufactures and processes food for sale in its supermarkets. It operates supermarkets in various formats. The company’s combination food and drug stores (combo stores) that operate as food stores consist of natural food and organic sections, pharmacies, general merchandise, pet centers, and perishables, such as fresh seafood and organic produce. The Kroger Co.’s multi-department stores sell general merchandise items comprising apparel, home fashion and furnishings, electronics, automotive products, toys, and fine jewelry. The company’s marketplace stores offer full-service grocery and pharmacy departments, as well as general merchandise area that includes outdoor living products, electronics, home goods, and toys. Its price impact warehouse stores offer grocery, health, and beauty care items.

Prognosis: The stock is down approximately 20% from the high it hit in the fall of 2009. It is currently at the lower end of a pretty tight 52 week range

Valuation: KR is selling for approximately 11.5 times this year’s consensus earnings and 10 times next year’s projected earnings. It also sports a dividend yield of just under 2% and is the lower range of valuation on a 5yr average based on P/E, Price to Sales, and Price to Book. It is a defensive play in an uncertain and slowing economy.

Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term:

  1. A new 500mm share repurchase plan was recently announced
  2. The Grocer has industry leading sales growth and we believe the market is overly concerned with competition from Wal-Mart (WMT), which should dissipate over time
  3. The company is a low price food retailer and should continue to gain market share with price reductions and improved service levels
  4. The company should benefit as consumers start to trade up a bit to higher margin goods, even in a slow growth economy.

Recommendation(s): This low beta stock is a decent play as economic growth decelerates. Given its current valuation and the earnings growth expected to take place over the next 12 to 18 months; our target Price is $23-$25 or 11-12 times next year’s expected earnings of $1.96, up from the current price of $20.10. Not a sexy pick, but one that will allow you to sleep at night.

Disclosure: Long KR

Source: Time to Go Shopping With Kroger?