Kroger: Does The Recent Pullback Present A Good Buying Opportunity?

| About: Kroger Co. (KR)

Summary

Kroger has dropped just under 13% since its high of 42.64 on December 29th, yet nothing has fundamentally changed with the company.

Continued company strength in the natural and organic food market makes KR a great candidate to come out a winner in this market volatility storm.

KR will be able to separate itself from the rest of the market once it reports earnings in March.

As the market continues its massive selloff and the worst start to a year ever, there remains to be some winners found within all of this turmoil. In order to find these winners, one must search through all of the companies without exposure to any of the prevailing issues, and that is exactly what we find when analyzing Kroger (NYSE: KR). KR's domestic business model helps insulate it from any turmoil we see abroad, while its continued strength throughout tough markets in the past make it a good candidate to come out a winner in times like these.

As you probably have read, KR has seen a staggering 48 consecutive quarters of SSS growth, but while this number is common to see while reading about Kroger, it is not a number that is seen anywhere else in the industry. This number helps prove that KR has been effective in implementing its growth model and remaining a force to be reckoned with. The strong management team behind Kroger has pushed their company to success in multiple markets across the US, and their focus on improving the customer experience has definitely contributed to their 48 consecutive quarters of SSS growth.

While all of this knowledge is good and well, one might ask themselves why we've seen KR's stock plummet just under 13% over the course of a month… and then we remember that it has been a market wide phenomenon. No stock has been able to hide from the volatility we've seen and the fact that KR's recent decline has had nothing to do with any fundamental change in the business helps provide us a great buying opportunity for a stock that may now be considered undervalued.

Oppenheimer recently picked KR as one of its "6 Oversold Stocks to Buy Now" and you could read their report here. They listed multiple reasons for continued strength, such as KR's revenue growth, notable ROE, good cash flow from operations, impressive EPS, and solid stock price performance in the past. These reasons all present a great summary as for why KR has outperformed in the past, but to get an accurate picture we'll have to break them down a little further.

For one, a large part of KR's revenue and SSS growth has been because of its push into the natural and organics space. Simple Truth, KR's premier brand in the organic space, has gone from being non-existent 4 years ago to now the single largest organic brand in the nation. The staggering double digit yoy growth Simple Truth has exhibited has helped KR consistently take market share from its main competitors. For the most recent quarter, KR reported comps of 5.4% while both large and small grocers in the natural and organic food space have been hurt. Two examples are Whole Foods (NYSE: WFM), who's comps turned flat in the most recent quarter and The Fresh Market (NYSE: TFM), who experienced a 3.7% decline in same store sales.

This strength compared to the industry provides us with reason to pick KR over its peers when trying to find winners after all of their massive declines. Although the outlook on Kroger looks promising when considering its recent company strength, there are still some long-term risks to its growth model. Credit Suisse recently noted that while Kroger is "a long-term structural winner" investors should proceed with caution. They sited deflationary pressures and a risk that when fuel prices eventually rise it will hurt customer's disposable income, causing them to spend less in store. Because of these risks, Credit Suisse lowered its price target for KR from $40 to $36, a stunning 10% drop, which proves these are something to keep an eye on.

Keeping the underlying risks in mind, KR remains a strong buy in my opinion based on its recent pullback of just under 13%. If the strong management team continues to propel KR to take market share from its competitors by attracting more customers to their stores, KR is definitely one to watch once they report earnings in March, a time that they may be able to separate themselves from the performance of the market.

Disclosure: I am/we are long KR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.