A Credit Suisse analyst upgraded shares of grocery chain Kroger Co. to "Outperform" from "Neutral" on Monday, citing a drop in the stock price since gasoline sales chilled during the third quarter.
Since that announcement on Dec. 11, the stock has fallen 7.5 percent, a drop that analyst Edward J. Kelly called "unwarranted" given firm grocery sales, which is the company's financial bread and butter.
"We believe the sell off since the company reported third-quarter earnings provides an attractive entry point into a highly defensive" stock with 20 percent growth potential in the next 12 months, Kelly said in client note.
A $45 million to $50 million drop in typically volatile fuel earnings hurt third-quarter results, he said.
"Rising gas prices hurt fuel earnings and falling prices help," Kelly said. "Fuel prices declined sharply during the third quarter of 2006 (creating an extremely difficult comparison) and rose in the third quarter of 2007."
While Kroger used a lower share count during the third-quarter, adding 1 cent to earnings, its noncash inventory charge during the period was 1 cent higher.
Among the grocery chain sector, Kroger has the most momentum going into 2008, "as its strategy of investing cost savings into lower pricing, service and selection has yielded solid results," Kelly said.
Margins should also improve next year, and the company may embark on a new share repurchase program, as its current $1 billion authorization is nearly finished.
The entire food retailing industry, Kelly noted, continues to grow despite a sluggish economy, most notably because what it sells is a necessity, not a luxury.
Indeed, a sluggish economy may even help: "Supermarkets may actually gain some share from casual dining due to trading down," he said.
Kroger's shares closed Friday's regular trading session at $26.21.
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