The Kroger Co. (KR), Safeway Inc. (SWY): Is This Grocery Stock Still a Buy?

It is very unusual for a non-cyclical grocery stock to rally 80% in one year’s time, but that’s exactly what The Kroger Co. (NYSE:KR) has accomplished. The stock, which traded flat in 2010, 2011, and 2012, has taken off, but is it still a good buy?

How Does it Compare?

The only way to know if The Kroger Co. (NYSE:KR) still presents value is to compare it to the grocery industry, and then to the S&P 500. This is a process of determining value that I explain in my book. Therefore, let’s compare Kroger to its closest competitor, Safeway Inc. (NYSE:SWY).

The Kroger Co. (NYSE:KR) is the ideal grocery company in terms of operating efficiency; Safeway Inc. (NYSE:SWY) with lower returns on equity investments and lower operating margins is the clear laggard.

Safeway Inc. (NYSE:SWY) has a cheaper P/E ratio, but is more expensive compared to future earnings. The reason is because Safeway is not growing; it is virtually standing still. The Kroger Co. (NYSE:KR) is not only growing revenue but is also improving its margins and remains very cheap relative to the rest of the market.

The S&P 500 trades at 1.5 times sales with a P/E ratio over 15. Therefore, both Safeway Inc. (NYSE:SWY) and The Kroger Co. (NYSE:KR) are cheaper than the S&P 500. However, the grocery business itself has the lowest margins in the economy, and since margins are always important to investors, it makes sense that Kroger and Safeway would trade at a price/sales discount. The discounted P/E ratio does indicate to me that there might be some value present in shares of Kroger.

The Kroger Co. (NYSE:KR) is the more efficient company, and when gauging investments, efficiency is awarded higher premiums. Therefore, it is a buy relative to the space and to the overall market.

One Dark Horse to Monitor

As I note in my book, you also must account for any unmeasured fundamental catalysts or risks that could be lurking for a company.

Amazon’s entry into the grocery business should be considered a risk. Currently, there are a lot of naysayers who don’t believe that Amazon will succeed. However, when Amazon was strictly a book company, not many thought it would have more than $65 billion in total sales over the last 12 months.

Amazon is testing its Fresh grocery business in L.A. and Seattle. Therefore, its grocery business has not affected the likes of The Kroger Co. (NYSE:KR). But make no mistake, Amazon will attempt to enter this space, and because of their track record, I have no reason to believe that they won’t succeed.

The grocery business produced $568 billion over the last year. The Kroger Co. (NYSE:KR) controlled almost $100 billion of that market, and leaders Wal-Mart Stores, Inc. (NYSE:WMT), Safeway Inc. (NYSE:SWY), and even Target Corporation (NYSE:TGT) combine to equal about 40%.