Kroger Is Expected To See A Big Jump In Earnings For Fiscal Q1

Summary

• Kroger is set to report earnings on Thursday and analysts are expecting an increase of 44% compared to Q1 2019.
• The stock has been trending higher with a trend channel forming that helps define the trend.
• Sentiment toward the stock is skewed to the bearish side.
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One area of the economy that has seemingly benefited from the global health crisis has been grocery stores. With so many people staying home and cooking for themselves with restaurants closed, grocery stores have seen a boost in sales. The industry hasn’t fully escaped the pandemic though as they have had to take extra measures to make sure the customers are safe. The industry has had to increase cleaning measures and in many cases stores have had to add employees. These steps have added costs and likely cut in to the margins for stores. Some stores also increased the pay of employees to compensate for the uncertainty surrounding the conditions they were being exposed to.

One of the largest publicly traded grocery store chains is Kroger (NYSE:KR) and the company is set to report earnings on Thursday. Analysts expect the company to earn $1.04 per share for the fiscal first quarter of 2020. The company earned $0.72 in the first quarter of 2019 and that would mean an increase of 44.4% if the estimate is accurate.

Over the last three years Kroger has averaged earnings growth of only 3% per year, but it did see a jump of 19% in the fourth quarter of 2019. Analysts expect earnings to grow by 21% for the year.

Revenue is expected to come in at $40.45 billion for the quarter and that is an increase of 8.6% over last year. Revenue has been growing at a rate of 2% per year over the last three years and it grew by 2% in the fourth quarter.

The company’s management efficiency measurements are mixed. The return on equity is above average at 21.7%, but the profit margin is below average at 1.8%. The stock is currently trading with a trailing P/E ratio of 15.9 and a forward P/E of 13.2.

As I expressed above, one concern for Kroger and all other grocery store operators has to be rising costs associated with cleaning and additional personnel.

Kroger’s Stock Trending Higher Within a Trend Channel

Kroger’s stock got hit pretty hard back in 2016 and 2017 when the stock fell from a high up near $40 and fell below the $20 level in the summer of 2017. The selling accelerated in June 2017 when Amazon ventured in to the grocery space with its acquisition of Whole Foods. The stock rallied back in the latter part of 2017, but it has never gotten back up close to the $40 level.

After dropping back down close to the $20 level last summer, the stock has been trending higher and a trend channel has formed that helps define the trend. The stock recently moved back above the $31 level which was a potential resistance point after halting the rally in mid-2018.

The stock has rallied approximately 60% from the low in ’18, but the rally has been somewhat slow and consistent rather than seeing huge swings up and down. One of clearest signs of the consistency is the 13-week moving average. Since last September the trend line has almost been a straight line.

Something else that stood out on the chart was the fact that the 52-week (one year) moving average just crossed bullishly above the 104-week (two years) moving average. There was a bullish cross of these two moving averages in 2018 and that didn’t really lead to a big bullish run. However, there was bullish crossover of these two moving averages in 2012 and the stock tripled in price over the next three years.

The Sentiment Toward Kroger is Bearish

Looking at the sentiment indicators for Kroger we see quite a bit of pessimism toward the stock. There are 25 analysts covering the stock right now with 11 “buy” ratings, 13 “hold” ratings, and one “sell” rating. This gives us a buy percentage of 44% and that is well below average.

The short interest ratio is at 4.2 and that is also more bearish than the average stock. If you take in to consideration the valuation, the ROE, and the insulation from the current health crisis, the bearishness seems surprising.

The put/call ratio is the only one of the three sentiment indicators that I watch closely that is showing any signs of bullish sentiment. The ratio is at 0.743 with 101,800 puts open and 137,053 calls open at this time. The average put/call ratio is in the 1.0 range, so Kroger’s is below average and an indication of optimism.

With two of the three sentiment indicators leaning to the bearish side and only one leaning to the bullish side, I view the sentiment as more bearish than bullish, especially considering pretty solid fundamentals from the company.

My Current Take on Kroger

There are a lot of things to like about Kroger. The fundamentals are good, but not great. The chart shows how the stock is trending higher and how the stock just moved back above the $31 area.

When you combine those facts with the sentiment leaning to the bearish side, it is the scenario that I look for as a contrarian.

As far as the earnings are concerned, Kroger has beaten EPS estimates in six of the last eight quarters. One of the misses came in March ’19 and it caused the stock to gap lower by approximately 12%. The stock didn’t really react much to the slight miss in December. The only time the stock has gapped higher after earnings in the last eight quarters was all the way back in June ’18 when it gapped up by 8%.

Based on the past reports, I wouldn’t be surprised to see Kroger beat its estimate once again, but it will need to beat by quite a bit in order to create a gap higher. Conversely, the company would need to miss by quite a bit to cause a gap lower. That statement is made based on the fact that the sentiment is skewed to the bearish side which indicates expectations aren’t all that high.

Kroger isn’t a sexy tech stock that I expect to jump 100% in the next few months, but I am bullish on the stock. I can see it continuing its trend higher over the next few quarters and I think the stock can gain 25% before the end of the year and move above the $40 level.

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