Whole Foods Dethrones Kroger, But Don't Expect It To Last

Includes: AMZN, KR
by: Mark Krieger

The largest supermarket chain is no more. Believe or not, Kroger (NYSE:KR) was dethroned as the largest market cap traditional grocer by Whole Foods Market (WFM)! How did this occur? Simple: WFM's stock has soared nearly tenfold in the last five years, while KR has actually lost 10% of its value (WFM's market cap now stands at $13.72 billion versus $13.70 billion for KR). Will this trend continue or will KR eventually take back bragging rights? If you compare the numbers on an "apples to apples" basis, the answer to that question will become crystal clear.

Although Kroger's sales of $89 billion and earnings of $1.15 billion dwarf its counterparts sales of $10 billion and earnings of $408 million, the market is giving WFM a huge market premium, as KR is selling at only 12 times its fiscal 2012 earnings estimates of $2.00, while WFM is garnering an absurd 34 times is fiscal 2012 estimates of $2.27. Common sense would dictate that if KR is making three times as much money, its market cap should also be three times as much, but just the opposite is occurring as Mr. Market is giving WFM a 2.8 times greater valuation. This extreme generosity can't all be attributable to earnings growth, as WFM's expected growth rate of 16%, is not that much greater than KR's 10% rate. WFM's price earnings to growth rate( PEG ratio) at 1.92 reveals no bargain when compared to KR's 1.12 rate.

Other possible reasons for such a disparity are: WFM holds no debt to KR's $7.7 billion burden and shows cash holdings of $654 million (three times greater than KR's). Kroger's union employees and pension fund responsibilities are also souring the Street's perception.

Stock buyback, dividends: KR's $2.5 billion stock buyback commitment represents about 18% of its total market cap while WFM's $200 million plan computes to a mere 1.5%. KR's dividend yield of 1.90% (it pays .46 per share) is 2.5 times greater than WFM's .70% yield (it pays .56 per share).The magnitude of KR's share buyback program certainly exemplifies management's quest to enhance shareholder value and that's a very good thing.

Wall Street's love affair with WFM just might be ready to end, at about the same time its disdain for KR vanishes. Could this impending phenomena offer opportunity to exploit? Most definitely, because in the stock market business, you have to buy unpopular and sell popular. How else are you supposed to buy low and sell high? Once you connect the dots, you will realize that Wall Street is about to come to its senses on these two mega supermarket operators. One should be bought, the other sold short.

Disclosure: I am long KR.