Warren Buffet famously said buy what you know. Naturally, grocery store chains seem like a perfect fit. When I took a closer look at the companies in this industry, though, my theory was put to the test.
I am a huge fan of EPS trends. They are one of the first things I look at when I first begin researching a stock. EPS trends help me figure out if there are any particular years during a company's history that stand out and require further investigation.
Above is a chart of SuperValu (NYSE:SVU), Safeway (NYSE:SWY), and Kroger (NYSE:KR). SuperValu's EPS performance along with its stock price performance warranted me to go back a bit further than I normally do. That's how I found out that in 2009 the drop in EPS was caused by an impairment charge which mostly consisted of goodwill from some retail food reporting units. In addition, the trend in dividends has not been optimal; in fact, SuperValu stopped paying a dividend after it declined dramatically.
The conclusion is that Supervalu is not the kind of stock that a value investor should own.
Safeway may look appealing due to the spike in the EPS for the latest year, but further investigation reveals that most of that profit came from discontinued operations.
Below is a breakdown of Safeway's profit between continuing and discontinued operations. According to the most recent annual report for Safeway, on Nov. 3, 2013, Safeway sold its Canadian operations, thus contributing to the huge increase in EPS for the period. You can clearly see that for the past 5 years a majority of the profits came from Safeway's discontinued operations.
Kroger on the other hand is worth a look. It is the only company on the list that has steady EPS growth coupled with steady dividend growth. Kroger's annual reports indicate nothing out of the ordinary. Sales have been growing steadily over the years.
It is quite clear based on the above that Supervalu's revenue growth has been in decline. Safeway's revenue growth is unclear at best, but Kroger has been able to generate revenue growth. Some years have been higher than others, but it is important to remember that growth no matter how small is still important.
Safeway and Supervalu could learn a thing or two from Kroger. Kroger's sales, dividend, and EPS have been increasing over the years, and its stock price never suffered the sharp drastic drop of the other companies signaling that Kroger is providing good value to its shareholders.
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Ravi Bala has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.