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Why Kroger Stock Will Shake Off a Bad Trading Day

By Will Healy - Mar 11, 2020 at 12:35PM

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While a market-wide selloff related to COVID-19 fears has hurt, the coronavirus could potentially benefit the grocery giant.

Kroger (KR -1.89%), like many stocks, plummeted in Monday trading as investors faced a massive oil-price war and coronavirus-driven sell-off. These fears have led to a run on store shelves. So strong were the sales in hand sanitizer that the company made the decision to ration that product. 

However, despite the panic buying that currently drives store traffic, Kroger, like other consumer staples stocks, sold off amid the fear.

Still, grocers do not typically see a big or permanent drop in business amid panics. Moreover, Kroger offers advantages that may make it a more appealing stock investment than other large grocers.

Kroger's financials appear attractive

Kroger has benefited in recent weeks after news broke that Berkshire Hathaway had opened a stake in the Cincinnati-based grocery giant. Looking at the financials, one might see what attracted Berkshire CEO Warren Buffett and his team to Kroger stock. 

Man looking at sauces, oils, and salad dressing in a grocery store aisle.

Image source: Getty Images

Wall Street predicts average annual earnings growth of 6.8% per year for the next five years. Also, Kroger trades at a forward P/E ratio of around 11.8. This valuation comes in well below that of peers such as Walmart (WMT 1.32%) and Costco, even though Kroger's P/E ratio has risen from 2018 levels.

To be sure, Kroger has lagged Walmart in sales growth. Kroger grew its sales by 2.3% in 2019, while Walmart had a 2.9% increase in net sales. However, Walmart trades at a forward P/E ratio of 22.4. This differential means that buyers of Walmart stock pay close to double the multiple for just over 26% more growth.

This struggle is nothing new. In 2017, Kroger stock fell as Amazon stoked fear in the industry by purchasing Whole Foods. This move led to fears that the e-commerce giant could supplant grocery retailers such as Kroger. However, as Kroger showed that it can grow despite that new competitive threat, its stock gained some traction. Still, the fact that Kroger stock remains well below its 2015 peak of $42.75 per share shows that Kroger has not fully recovered from the Amazon-induced sell-off.

KR Chart

KR data by YCharts

Further, investors should take the company's dividend into account. At $0.64 per share, Kroger's dividend yields just over 2%. Moreover, with a payout ratio of close to 27.2%, it should remain in a position to continue its 11-year streak of consecutive dividend increases.

Kroger (and Kroger stock) holds a unique position in the market

Both the valuation and the dividend payout benefit Kroger stock. According to Progressive Grocer, Kroger was America's second-largest grocery chain in 2019, lagging only Walmart. The majority of these grocers remain in private hands. The only other publicly traded retailers in the top 10, Walmart and Amazon, sell a more diverse array of items. This means that Kroger is the largest company to trade predominantly as a grocery play.

Moreover, those other companies source a significant percentage of their goods from China. Yes, Kroger began a partnership with Alibaba in 2018 to sell its Simple Truth products in China. Still, that amounts to a tiny percentage of its overall business. Though Kroger did not break down China sales, Simple Truth was a $2.3 billion brand at the end of 2018, a small percentage for a company that reported $28.9 billion in sales for the fourth quarter of 2019.

Kroger also can offer some assistance to those who either have COVID-19 or are afraid of contracting it through contact with the novel coronavirus. It operates 2,758 retail grocery locations, and 2,268 of those stores also operate pharmacies. Additionally, many of its stores provide delivery services. Not only can the company deliver groceries in as little as one hour, but it sells over 70,000 items through delivery alone. Between the massive physical footprint and the extensive online offerings, Kroger offers an authentic omnichannel experience across much of the country.

Some investors may understandably harbor fears about buying in the current market. However, some companies will benefit from the virus, as we saw in the recent run on various health- and cleaning-related products sold many retail stores. Moreover, the stock sell-off offers investors the chance to buy stable, well-run companies such as Kroger at a lower price. Thanks to the 6% drop in price over the past week, investors can now buy Kroger shares and its income stream at a discount.

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Stocks Mentioned

The Kroger Co. Stock Quote
The Kroger Co.
$47.23 (-1.89%) $0.91
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$124.25 (1.32%) $1.62

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