Is Kroger Undervalued?
Maxwell 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) along with its 24 different banner names, is the largest traditional grocery company in the United States and employs over 338,000 people across 31 states and over 2,400 stores. The Cincinnati, OH based company also owns numerous convenience and jewelry stores as well as a network of supermarket fuel centers that draws many of its customers to its stores. Its more popular chains include Food 4 Less, Meyer, JC and City Market. In my opinion, Kroger’s extensive portfolio of supermarket chains and its performance in a highly competitive market contribute value to the company that is not representative of its current share price and I expect the market to adjust accordingly in the near future.
For 29 consecutive quarters, Kroger has produced positive sales results despite the deep recession that has sent many retailers and supermarkets into the red. Since 2006 when it reinstated its dividend, Kroger has given back to shareholders in excess of $4.6 billion through dividend payouts and stock repurchases. In September of 2011, it announced plans to buy back an addition $1 billion worth of shares, giving back even more to its investors and affirming its commitment to providing value to its shareholders.
Kroger owns about 40 food processing plants across the country, which allows it to produce its own products to market throughout its stores. Its ability to produce its own product lines has led to higher margins in the past and has made the difference in a tough economy when consumers have sought out generic versions of popular products in order to save money to meet shrinking budgets. It has not only been able to defend its market share against incursions from large retail competitors such as Wal-Mart (NYSE: WMT), but it has actually increased its share over the last decade.
Wal-Mart showed revenue growth over the last year of 5.9%, which Kroger edged by over a point and a half— with its own growth of 7.4%. SuperValu (SVU) posted a revenue decline of 4% with a poor economy contributing to its decline in sales while both Kroger and Wal-Mart were able to weather the economic storm created by the Great Recession. Kroger is one of the best performing traditional grocery companies against the incursion of Wal-Mart, which has been known to challenge supermarket chains in the past.
Companies such as Wal-Mart and Target (NYSE: TGT) have made attempts at incursions into Kroger’s market in recent history. The most recent incursion has been that of Target’s new Pea Fresh grocery units throughout its retail stores that reflect Wal-Mart’s attempts at becoming a combined retailer and grocer. Despite these incursions, Kroger has continued to increase its market share and its momentum remains unaffected.
In 2009, Kroger posted net revenue of over $1.2 billion followed by a mere $70 million in 2010 due to about $1.1 billion in nonrecurring costs for the year that would not repeat in 2011 when it realized a net of $1.1 billion to prove its resilience in a tough economy while competing with superpowers like Wal-Mart and Costco . As a sign of dedication to its shareholders, Kroger pays out a quarterly dividend at a ratio of just over 0.45 and increased its dividend in November of last year by almost 10%.
Kroger’s dividend of $0.115 per share provides a total payout of $0.46 per share annually and equates to a yield of nearly 2%, which is a decent sum for income investors to reinvest in the stock for a stronger position and greater gains in the future. Kroger’s consistency shows that its dividend is not in danger and as the country begins to come out of its recession, there is the real potential that Kroger’s profits and dividend could increase as the result of new economic growth.
Over the last three years, Kroger stock has grown from $19 per share to $24, showing very steady and slow gains that are guaranteed for years to come. Its performance in its market and 29 consecutive quarters of positive sales results make me believe that it is greatly undervalued, however, and I would value Kroger between $30-35 per share on its history and its future potential.
I expect Kroger to continue to grow through 2012 and I think that it could even increase its dividend another time if the economy continues to improve. Even if the economy slips and begins to move into a double dip recession, I believe that this position is still relatively secure due to Kroger’s proven ability to find a path to success despite poor economic detractors in the past. Competitors have added quite a bit of pressure on Kroger in recent years, but it has not been enough to alter Kroger’s course or slow its momentum.
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