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).
| Kroger | Safeway | |
|---|---|---|
| Market Cap (billions) | $20.55 | $6.2 |
| P/E Ratio | 13.66 | 11.82 |
| Forward P/E Ratio | 12.71 | 13.12 |
| Operating Margin | 2.91% | 2.53% |
| Operating Income Growth (year-over-year) | 8% | 0% |
| Price/Sales Ratio | 0.21 | 0.14 |
| Revenue Growth (year-over-year) | 3.4% | (1.6%) |
| Return-On-Equity | 35.81% | 20.75% |
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 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%.
The Kroger Co. (NYSE:KR) has begun to sell more discretionary items in its Marketplace stores, but remains a grocery-focused business. If in fact Amazon launches its global grocery business in the next 16 months, Kroger could see a significant fundamental problem – much like what Amazon did to Best Buy Co., Inc. (NYSE:BBY).
Final Thoughts
Right now, as of this day, I still think The Kroger Co. (NYSE:KR) is a good investment opportunity. The stock is cheap and is increasing its margins and revenue. However, once Amazon launches its grocery service, investors will have to reassess their Kroger position.
In regards to Amazon, I like the stock. The potential for e-commerce is way beyond household appliances and books, and I think the addition of a $568 billion market could catapult Amazon to a new level.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com (NASDAQ:AMZN). The Motley Fool owns shares of Amazon.com.
The article Is This Grocery Stock Still a Buy? originally appeared on Fool.com.
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