Here's Why Kroger Is Still a Buy

Despite large gains, Kroger might still be cheap and poised to trade considerably higher.

Jun 25, 2014 at 4:07PM

It's rare to see one of the world's largest noncyclical companies more than double the performance of the S&P 500 index in stock performance over a two-year period. Yet Kroger (NYSE:KR) has done just that, and compared to peers like Wal-Mart Stores (NYSE:WMT) and Whole Foods Market (NASDAQ:WFM), there might be reason to believe that much higher days are ahead.

A reason for optimism
Kroger announced fiscal first-quarter earnings on Thursday and saw its shares soar 5% behind the report. The company reaffirmed its long-term net earnings-per-share growth rate of 8% to 11% and raised its full-year EPS guidance by approximately $0.05. As a result, shares are now in uncharted territory.

KR Chart

Kroger data by YCharts.

However, Kroger's two-year stock return of 117% may be just the beginning of a much longer-term trend of gains. There are two reasons for this prediction: growth and valuation.

Middle of the spectrum
Kroger lies in the middle of a spectrum that includes Wal-Mart on the high end and Whole Foods on the other. Wal-Mart is the world's largest retailer, and its growth is a fair reflection of the overall economy, as is its valuation premium.

Meanwhile, Whole Foods is one of the faster-growing major grocery retailers in the U.S., with a niche market in the organic and all-natural food category. Thus Kroger's growth and valuation premium should lie somewhere in the middle.

Strong evidence of execution
During Wal-Mart's last quarter, it reported total sales growth of 0.7% with comparable-store growth in North America flat year over year. The company's overall traffic declined 1.4%, and the only noticeable strength in North America was its e-commerce channel, which is growing at a 30% annual rate.

Whole Foods' revenue increased nearly 9% in its last quarter, although much of the growth was in connection to expansion both in the number of stores and in square footage per store. So on a comparable basis, its growth was only 4.5%, which lags the rate at which organic food consumption has grown in the U.S.

Meanwhile, Kroger, a company that should fall somewhere in the middle, grew revenue nearly 10%. Also, Kroger saw a 4.6% growth in identical-supermarket sales. Kroger defines a supermarket as identical when it has been open without expansion or relocation for five full quarters. For a company that already owns 20% of the U.S. grocery market such growth is fascinating, is outperforming both Wal-Mart and Whole Foods.

Is Kroger fairly valued, overvalued, or undervalued?
Yet despite Kroger's strong growth, margin improvements, and continued expansion with its supermarket concepts, the stock trades at only 14 times next year's earnings. This is almost identical to the S&P 500 and is just slightly better than Wal-Mart's 13.4 times forward earnings ratio.

KR PE Ratio (Forward 1y) Chart

Kroger P/E ratio (forward 1 year) data by YCharts.

Also, Whole Foods trades at 23.4 times forward sales, further showing a wide disconnect between Kroger's fundamental performance and valuation. In other words, due to the valuation premiums of both Whole Foods and Wal-Mart, we can rationally state that Kroger is both undervalued and poised to trade even higher long-term.

Foolish thoughts
Based on Kroger's fundamental performance, it is worth at least the same 23.4 times forward earnings multiple that's been given to Whole Foods; we can call this multiple Kroger's fair value. If we consider Kroger's long-term EPS growth guidance of 8%-11% and aggressive buyback strategy -- Kroger has repurchased 41.8 million shares over the last five quarters -- then the stock could easily double over the next couple of years while still staying attractive. For investors looking to limit risk with a quality noncyclical investment, this means that Kroger has to be atop the list of golden opportunities.

Leaked: This coming device has every company salivating
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we buy goods, but potentially how we interact with the companies we love on a daily basis. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns, you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Whole Foods Market. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers