When news broke Friday that Amazon (NASDAQ:AMZN) was about to acquire Whole Foods Markets (WFM) for almost $14 billion, the retail side of the market steered itself in an old-fashioned panic mode. Companies across the whole range of competitors [Kroger (NYSE:KR), Ahold (OTCQX:AHODF), semi-competitors (Wal-Mart (NYSE:WMT), Target (NYSE:TGT)] and even the "semi-semi-affected" shopping mall REITS went down significantly. While there is arguably some reason to worry, the sell-off we experienced Friday was overdone at best. Therefore, I purchased some extra Ahold at a 15% discount. Here's why…
I believe Ahold's drop to be a strong overreaction but I understand where its coming from. Investors generally dislike uncertainty and at current market heights, everyone seems on high alert to get out of their positions at the first signs of adversity. Those signs arrived earlier in the week, when Kroger presented poor guidance. This caused Ahold's stock to lose 4% on Thursday. The sell-off on Friday added to 10% this, causing a drop of 15% on pure industry sentiment alone.
To assess the impact on the retail industry is difficult at this point, adding to the existing uncertainty. Amazon is a company that has outstanding supply chain capabilities and has proven itself in that market for a while now. At the same time however, it has exhibited quite some empire building traits as the company battles companies in logistics, automotive, technology and media. As of now that also includes (apparently) grocery chains across all segments. That is a lot to focus a limited amount of attention on. At the same time Ahold uses all of its focus on one single capability.
Ahold is a key player in the Netherlands and Belgium, but aims its focus on specific parts of the US (for a more detailed overview on the company see my analysis here). The Peapod stores are a primary example of this, offering a quality online offering of organic and fresh foods. It is exactly these things that Amazon claims to disrupt the industry with, but also something is already being successfully exploited by Ahold, too. Going forward, it will only benefit from the experience it gains at this point, and albeit on a small basis, the mid-20% growth rates for this concept show its quality and potential.
In addition, Ahold itself obtains a lot of profits in the convenience store segment. People forgetting their lunch, grabbing a cup of coffee or buying dinner for the night after work are usually less price sensitive and happy to pay the higher price for a convenient location. This includes good service and continuously well-stocked shelves. As a result, the stores will be less affected by a potential Amazon-go shop as its visitors simply value the convenience of the entire experience rather than just the price alone.
Let it be clear that I am not downplaying the acquisition to a non-event. However, it has been known for years now that Amazon had its projects with respect to the grocery market, and we also knew that the development of these plans is in an advanced stage. One simply needs to glance at the Amazon-Go project to realize the company is here to stay and will contribute to technological innovation, maybe even some form of disruption. In that regard, the acquisition is another sign of commitment. However, at 400 stores one can question its significance and there are many unknowns still to be uncovered.
At current prices, one pays around 7x annual cash flows for a quality company. With it, you get a 3.5% dividend, and the last years have seen €1 billion buybacks on top. Given the current market cap of around €20 billion, this increases price upside substantially. All in all, I acknowledge the uncertainty Amazon brings. However, I like the opportunities that come along with the fear around its presence even more. This Friday was a primary example of just that.
Disclosure: I am/we are long AHODF, ADRNY.
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.
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