Is Kroger Superior to Costco and Wal-Mart?

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Kroger (NYSE: KR) reported as fairly solid quarter. The company is known for selling food products and operating grocery chains like Fry’s. This is one of the best defensive stocks to own in market volatility. For all of you bond investors who are looking for a safe haven, this is the company for you.

Earnings highlight

The company reported a 3.4% growth rate in year-over-year revenue for the second quarter of 2013. The growth in sales was driven by its grocery operations as the growth rate excluding fuel was 3.8%. The management team was pretty optimistic, as the company was able to grow its earnings from $0.78 to $0.92, an 18% improvement year-over-year.

The significant growth in earnings was driven by improving the operating profit margin from 2.8% to 2.9%. In the world of groceries, a 10-basis point improvement in margins is an event where both the analysts and the management team get up and start dancing. Grocers have razor-thin profits, I mean they are so thin that they would make an iPhone look fat. A small improvement in margins goes a long way.

That being the case, the company came out with a 1.6% profit margin for the quarter, which was better than the 1.5% profit margin that it reported in the same period a year ago.

The company raised its guidance by $0.01 to $0.02 for the full year. It believes that it can continue a long-term growth rate of 8 to 11%, and as such will continue to increase the size of its dividends going forward.

Investment opportunity

This is the type of investment that would appeal to low-risk investors. The company operates 3,600 supermarkets, convenience stores, fine jewelry stores, and similar retail outlets. Its primary business of selling groceries is pretty resistant to cyclical recessions. The company has an every-day-low-pricing strategy that seems to be working effectively and is moving away from the coupon business.

With an 8 to 11% long-term growth rate on earnings and a 1.82% dividend yield, the company is a compelling investment opportunity. The company's stock currently trades at a 12.2 earnings multiple, which is reasonable based on its projected growth.

Kroger has grown its dividends by 12.05% on average over the past five years. With the management team planning to continue growing dividends, you have a fairly solid investment opportunity here.

Other investment opportunities

Wal-Mart (NYSE: WMT) is a great company. I tend to like this company a lot because it’s similar to Fry’s. Wal-Mart has consistently grown its profit margins over the past ten years. The company has also been able to grow earnings even through periods of economic contraction. It seems like a stable growth investment based on its share buy-back program, growth in its store footprint, and same-store-sales growth in both Wal-Mart and Sam’s Club stores.

The company is projected to grow its earnings by around 9.3% on average over the next five years. The growth in earnings also comes with a 2.5% dividend yield. The company isn’t very volatile in nature based on its 0.3 beta rating. It currently trades at a 14.8 earnings multiple, making it slightly more expensive than Kroger and implying that Kroger has the potential to generate higher returns on investment than Wal-Mart. Kroger is also a riskier investment, however.

Costco Wholesale (NASDAQ: COST) has been able to report fairly solid growth through its ultra-low-price membership-driven retail business. If you buy in bulk, this company will sell you products at the lowest price possible. It can be difficult to buy groceries in large quantities without it going to waste, however. Anyone who wants to save money on food will find the packaged goods and the frozen section their best friend, however.

The company is projected to grow its revenues by 6.9% for the full year. Comparatively, Kroger is projected to grow sales by 2.6% for the full year. Costco Wholesale is a faster-growing business than Wal-Mart and Kroger, but it also trades at an astounding 23.9 earnings multiple. Analysts on a consensus basis anticipate Costco Wholesale to grow by 13.47% on average over the next five years. The company pays a 1.15% dividend yield.

Conclusion

I think that both Kroger and Wal-Mart are better investments than Costco Wholesale. But investors who want to diversify should consider investing into all three companies. All three companies are likely to generate reasonable returns on investment.

Costco's low prices haven't just benefited customers -- shareholders have walloped the market, returning 11,000% over the past two decades. However, with prices near all-time highs, is the ride over for Costco investors? To answer that and more, The Motley Fool's compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource.

 


Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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