Kroger: A Tale of Two Views

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What do you do with a stock when the company seems quite well run but the shares just don't seem to have that much upside to them? That's the dilemma facing holders of Kroger (NYSE: KR) stock.

The supermarket chain did nothing in the fourth quarter to change my view that it's a well-run company. Sales rose more than 7%, identical-store sales (without including gasoline) rose 4.7%, and operating income was up more than 29% when you adjust the year-ago number for a goodwill write-off.

The same goes for the full-year numbers. Kroger boosted its free cash flow considerably, initiated a dividend, and produced a return on invested capital that exceeds my estimate for the company's cost of capital.

I also respect this company for being an opportunistic competitor -- when there's a weak player in one of its markets, it has a track record of increasing its competitive pressure and gaining share. So while SuperValu (NYSE: SVU) is buying many Alberstons (NYSE: ABS) stores that compete directly with Kroger, I prefer Kroger's odds of continuing to beat up those competing locations. Likewise when it comes to competing with giants such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) or specialty grocers such as Whole Foods (Nasdaq: WFMI) -- Kroger isn't going to wallop these competitors, but it does seem to be holding its own.

But when it comes to talking about the stock, things get less cut and dried for me. While I realize readers don't want a bunch of mealymouthed "maybe it'll go up, but maybe it won't" junk, I also have to be as honest as I can about this. And, honestly, I'm still a little flummoxed.

On one hand, we have a company with a history of success that seems to be earning back its cost of capital. On the other hand, we're talking about a low-margin industry with vicious competition and a stock price that doesn't suggest a whole lot of upside. So here's where I come down -- I'm looking for bigger opportunities for my own portfolio, but past experience suggests that it's OK to stick with good companies even if they don't seem immediately attractive, since the odds are that most of the surprises will be good ones.

For more Foolish food for thought:

• Distractions at Whole Foods
• Organic Growth at United Natural Foods
• Albertsons Rings Up No Sale

Whole Foods is a Motley Fool Stock Advisor recommendation. Get more of Tom and David Gardner's recommendations free for 30 days when you start up a trial subscription to the Stock Advisor newsletter.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).