Kroger: Opportunity On The Crash

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About: Kroger Co. (KR), Includes: WMT
by: Christopher Price
Summary

Kroger is one of the leading grocery chains in America.

Revenue came in ahead of estimates, but guidance dropped estimated EPS for the year.

This leads to a major discount of Kroger shares; therefore, I bought some more.

About three months ago, I suggested that Kroger (NYSE:KR) was on my watch list with an article I titled "Let's Go Krogering." The title was tied to an old jingle from commercials that the company aired during my youth in West Virginia. I bought a small batch shortly thereafter.

You can read the previous article for a more detailed analysis as to why it was on my watchlist, but I'll note some of the high points here.

First, Kroger is in a pretty recession proof industry. People have to eat. They have to eat whether the economy is going gangbusters or whether it's circling the drain. Of course, these people have options with lower-cost retailers like Wal-Mart (NYSE:WMT) and any number of dollar stores that offer groceries. However, Kroger has done pretty well, even growing during the Great Recession.

Second, Kroger has a huge reach that's not tied to the traditional grocery store. There are pharmacies, convenience stores, and gas stations that add to its revenue. Therefore, it's not a one-trick pony.

Third, it's had a great history of growth. This latest guidance might be a sign that this growth is slowing down, which is definitely a downer.

My thesis in the Let's Go Krogering article was that the company was a good buy at $28.93. I didn't buy at quite that level, but did get in around $30. The stock was down nearly 26 percent from its 52-week high at the time.

Today, Kroger dropped its earnings guidance from $2.21-$2.25 to $2.01-$2.05. This was a 9 percent drop in the guidance. However, it dropped the price by about 18 percent. It's now more than 35 percent below its 52-week high.

I remembered some lowered guidance from Wal-Mart a couple of years ago. I had bought in at $71, and the stock dropped to around $66 at the time of the bad guidance. Many articles on Seeking Alpha and other avenues foretold the demise of Wal-Mart. Then it dropped more than 10 percent in a single day, and this news caused the stock to drop to $56 and some change.

I was able to average down in the retail giant, and within just a few months, the price stabilized and it gave me a pretty good return with a heightened dividend yield that was nearly a full percent higher than it is today.

Today, Wal-Mart is trading above $78/share. Those who bought in at the low have done quite well for themselves for taking the risk.

Will Kroger behave similarly? No one can tell the future. However, if my thesis that it was a decent buy at $30 was correct, it's an even better buy at less than $25.

Kroger's dividend payout ratio according to Dividend.com is 21.6 percent, although this does not take into account the lowered guidance. This is very sustainable even with the lowered guidance.

Revenue actually came in higher than was expected, which is generally a good thing.

The PE ratio, even with the lowered guidance is now around 12.5 times the estimated earnings for the year, which is well below what it was when I wrote the Let's Go Krogering article.

The dividend yield jumped from around 1.6 percent to 1.95 percent (as of 12pm EDT on June 15). Therefore, I'll be making more income on my buy.

Looking at all of these reasons, I decided to double down on Kroger today. Warren Buffett has famously said to be fearful when others are greedy and to be greedy when others are fearful. I decided to add and got in at $24.62, which dropped my cost basis on my total holding of the grocery giant to less than $27.

I view this as a sale, and I like to shop when things are on sale.

Will this be a great move? Only time will tell, but I believe that Kroger is a solid business that should continue to bring in major revenue and profits over the long haul.

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.

Additional disclosure: I am not a licensed financial professional. This article is only for educational/entertainment purposes and should not be construed as a recommendation to buy or sell any securities. As losses up to and including all capital invested can occur, be sure to do due diligence and check with a financial professional before investing in securities.