Ahold Delhaize: Another Merger Does Not Seem Unlikely
- Ahold Delhaize delivered a good 2017 earnings report.
- Competition of Amazon and Lidl is coming.
- Acquisitions/mergers can offer a solution to this problem.
Source: Google Images
Ahold Delhaize's (OTCQX:ADRNY) (OTCQX:AHODF) share price was €19.25 at end of the trading session of the 13th of June 2017. In one week, the stock tumbled to €16.04. The stock crashed for two reasons. The first was competitor Lidl announcing that it would open 10 stores in east America. The second reason was Amazon (AMZN) announcing that it would also join the food retailer market by buying out Whole Foods. These 2 events caused Ahold's stock to decline 16%. Currently, the stock recovered and it is trading back at its old level. This made me reconsider if I should still hold my Ahold shares, even with the upcoming competition.
The Dutch company Ahold merged with the Belgian Delhaize on July 23, 2016. Synergies of the merger still have to kick in. Because of this, the company still reports its earnings Pro Forma. The Pro Forma information represented below includes the historical results of pre-merger Ahold and Delhaize and post-merger Ahold Delhaize.
Before starting to discuss the fundamentals, I would like to point out that Ahold Delhaize is a Dutch/Belgian company and thus reports its earnings in euros. Currently, the EUR/dollar exchange rate swings between 1.20 and 1.25. You should realize that by investing in Ahold Delhaize as a U.S. investor, you are exposed to (unwanted) exchange rate wins or losses.
Source: Ahold Delhaize Q4 2017 Summary Report
Ahold Delhaize reports its earnings in 5 different categories, Ahold USA, Delhaize America, The Netherlands, Belgium and Central and Southeastern Europe. The earnings data above shows the company's group performance in 2017. Every segment managed to grow net sales that year (cannot be seen in the diagram), but still the overall net sales declined by 2.8%. This is due to the stronger euro. As I pointed out earlier, currency risks are a real threat to Ahold Delhaize's top and bottom lines. Ahold USA, for example, managed to grow net sales in dollars by 1.1%, while its net sales in euros declined by 9.3%. Therefore, it does not come as a surprise that net income in that segment also declined by 2.3%.
The operating income of all segments combined increased 6.3%, with constant exchange rates it increased 12.7%. This seems like a lot and you therefore may expect Ahold Delhaize to be a growth stock. This is actually not true, the earnings increased mainly because of the synergies from the merger. Synergies are expected to help the earnings grow until end 2019. So 2018 and 2019 will probably still be years of growth, but starting from 2020, I expect the growth to start decelerating.
The company increased its dividend by 10.4% to €0.63. This brings the yield to 3.4%, which is quite nice. The company has a payout ratio of 47% Pro Forma and stated that it is planning to keep increasing the dividend in a sustainable way. The P/E ratio of the company is 13.8, which is significantly higher compared to the 11.5 of its peer Kroger (KR) and in line with Target (TGT), which has a P/E ratio of 13.6. I think Ahold Delhaize and Kroger are quite equally valued, keeping in mind that Ahold Delhaize has 2 more years of synergies to kick in. Therefore, I conclude that Ahold Delhaize is not trading at a premium or discount, compared to its peers.
After seeing the 2017 earnings report, I was quite excited about the company. It looks cheap compared to the P/E ratio of the SPY (SPY), which is almost 25. Ahold Delhaize gets around 61% of its revenue from the American segment, according to Bloomberg data. As I pointed out in the introduction, competition is growing in the US. I do not think Ahold Delhaize stands a change against the threat of Amazon and the German discounter Lidl in the long run, at least not alone. Ahold Delhaize currently has an advantage over Lidl, because the German retailer does not deliver groceries at home. However, Amazon does and has way more scale and experience in delivering goods. Therefore, I expect consumers to visit Lidl stores when they want cheap groceries and to buy them online from Amazon when they want the luxury of having them delivered for a slightly higher price. This leaves Ahold Delhaize in the middle, because it is not specialist in either home delivery, nor heavy discounting. There are speculations that Ahold Delhaize will merge again; for example, with Target or its rival Kroger. Another merger can give Ahold Delhaize the scale advantage to keep up with Amazon's distribution network. The economies of scale can also help the company to reduce prices while still staying profitable.
There are also speculations of Ahold Delhaize selling its own US business. Amazon could, for example, be interested in acquiring it. The takeover would help Amazon to expand its distribution network in the cities. Currently, I do not expect Ahold Delhaize to be taken over, but I like the idea. It provides some sort of safety net for the upcoming competition. The stock price of Ahold Delhaize will decline when a price war breaks out, resulting in Ahold Delhaize being cheaper to acquire. Shareholders will get a nice premium when the company gets taken over, covering some of the losses they made.
Ahold Delhaize's stock tumbled in mid-June 2017, because Amazon and Lidl joined the US food retail market. The stock is currently trading above levels prior to the crash and has a P/E ratio of 13.8. This makes the stock look cheap, especially in the expensive market we currently have. The company has had some nice earnings boosts, mostly because of the synergies from the merger of Ahold and Delhaize and is expecting more synergies to kick in until end 2019. The dividend is sustainable and provides a nice 3.4% yield. One of the biggest threats is the upcoming competition from Amazon and Lidl. For now, I expect the new competitors to not be a real threat, they just joined the market and have a quite small market share. In the long run, I can see them becoming much more of a threat and expect the retail market to experience even lower margins than it currently has. There are rumors of Ahold Delhaize merging again. This will help the company stand its ground against the new competitors. I will keep my position in Ahold Delhaize for now. But I will monitor the company closely. I will not add extra shares, because you never know when a potential price war can kick in.
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Analyst’s Disclosure: I am/we are long ADRNY, AHODF. 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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