Kroger: Cheaper Than Its Peers

| About: Kroger Co. (KR)

Last week, Kroger (NYSE:KR), one of the largest traditional supermarket operators, reported its fourth quarter earnings and delivered strong performance, despite posting a loss due to pension plan losses. Over the past year, grocery stocks have come center stage due to rising food prices, a more competitive landscape, and an ever-changing consumer. Last month, Whole Foods (NASDAQ:WFM) reported a strong quarter while Safeway (NYSE:SWY) reported weaker than expected profit due to rising inflation. A smaller more speculative grocery company The Fresh Markets (NASDAQ:TFM) will report its fourth-quarter earnings on Wednesday, which will prove whether or not the company is being hit as hard as others by rising food costs. KR has performed very well over the past year as it has solidified its pricing strategy and maintained brand loyalty. KR CEO David Dillon states:

Kroger's strong performance rewarded shareholders in 2011. We delivered adjusted earnings of $2 per diluted share, a 15% increase in earnings over 2010. We hit the high end of guidance despite a much higher LIFO charge. We increased our quarterly dividend payment by almost 10%, and we implemented an aggressive stock buyback program using Kroger's strong free cash flow to repurchase 67 million shares… as we look to 2012, we expect the external environment to be a little better than 2011. All of the data we're seeing suggests the overall economy and customer sentiment are improving.

These results speak to the company's clear fundamental sound and allude to a stronger economic landscape for grocers in 2012. From a stock perspective, KR is "cheaper" than its peers due to a low valuation. For this reason, KR has strong upside potential if the company can continue to show strong revenue and profit.

Forward Price/Earnings: The PE ratios below illustrate that KR is priced below its peer groups' PE ratio. The company continues to reinvest into its infrastructure and return solid results to investors. For this reason, KR has upside potential.

  • KR: 9.80
  • SWY: 11.10
  • WFM: 30.83
  • TFM: 34.46

PEG Ratio: The comparative PEG ratios of these four companies illustrate that WFM is priced below the 1 threshold and thus is undervalued compared to its peer group. KR is priced well below WFM and TFM, which are both considered growth stocks. This is remarkable as KR PEG is well below the revered WFM.

  • KR: .99
  • SWY: 1.49
  • WFM: 2.01
  • TFM: 2.02

Cash-Debt: Though KR holds the most debt of the group; it is also the largest and has used its capital well to build solid revenue and profit. Due to the company's $3.14 billion cash flow, this level of debt is not particularly concerning from an investor's perspective.

  • KR: -$7.554 Billion
  • SWY: -$4.623 Billion
  • WFM: $829.87 Million
  • TFM: -$66.3 Million

Return on Equity: The ROE that KR brings to investors is nearly double what its closest peer is returning. This illustrates that KR has a clear vision for where its capital is going and is using its equity wisely.

  • KR: 23.31%
  • SWY: 11.93%
  • WFM: 13.07%
  • TFM: N/A

Dividend: Though WSY has the highest dividend of the grouping, KR is a more secure and stable company than SWY, as evidenced by its recent earnings, and thus the slightly lower dividend does not make KR a less attractive buy.

  • KR: 1.90%
  • SWY: 2.70%
  • WFM: .70%
  • TFM: 0%

The Past Year's Stock Performance: As evidenced by the chart below, KR has performed at a lower level than its peer group and thus this presents upside potential in the wake of a stable fundamental outlook.


Conclusion: Due to the financial valuation of KR coupled with the company's stable business outlook, KR is undervalued compared to its peer group. The PEG ratio is especially important as it shows that in terms of the company's growth/earnings, KR is undervalued. This sets the stage for future growth in the stock price that would lead to a more realistic valuation of the company. The numbers speak for themselves…

(All financial data above is obtained from Yahoo! Finance)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.