Time to Buy the Recent Surge in Kroger (KR) or Albertsons (ACI) Stock?
Kroger KR) shares spiked +3% today on news that the retail supermarket chain would sell more than 400 stores to C&S Wholesale Grocers in an effort to appease the Federal Trade Commission (FTC) on its proposal to acquire Albertsons ACI.
In addition to this, Kroger reported its Q2 results with earnings of $0.96 per share topping expectations by 4% despite sales of $33.85 billion coming up -1% short of estimates. However, Kroger has now surpassed earnings expectations for 15 consecutive quarters.
Naturally, monopoly fears have existed as a formation with Albertsons would create a mega-chain in the supermarket industry. Like Kroger, Albertsons stock has rebounded lately and is up +6% this month but still -30% below its acquisition price of $34.10 per share in a deal that would be valued at $24.6 billion.
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FTC’s Monopoly Concerns
Even after this morning's announcement that Kroger would divest hundreds of stores, the combined stores that the company would operate upon acquiring Albertsons could still be close to Walmart WMT, which has over 4,000 domestic stores.
This market dominance would be exciting for investors but worries the FTC as Walmart is an omnichannel retailer that was built up internally over time and not a pure-play grocery chain that monopolizes the market.
Growth Potential
Gravitating to the growth conversation of a potential Kroger and Albertsons merger is at the forefront of investors' minds and the FTC’s agenda.
Taking a look at total sales is a way to see the viewpoint of what would be high investor sentiment and the FTC’s concerns. Kroger’s sales are forecasted to be up 2% in its current fiscal 2024 to $151.61 billion with Albertsons' sales expected to rise just over 1% at $78.86 billion.
Theoretically, their combined annual revenue would be $230.47 billion which is still far below Walmart’s anticipated $642.11 billion in sales. However, about half of Walmart’s sales are attributed to groceries including online purchases which would bring a Kroger and Albertsons combo closer to that mark with it being plausible that their growth will be vastly compounded going forward.
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EPS Outlook & P/E Valuations
Regarding their bottom lines, Kroger’s earnings are projected to rise 7% in FY24 but dip roughly -1% in FY25 at $4.48 per share. Kroger’s stock currently trades at 10X forward earnings which is a nice discount to the Zacks Retail-Supermarkets Industry average of 13.3X and the S&P 500’s 20.8X.
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Turning to Albertsons, its FY24 earrings are expected to dip -16% after a very tough-to-follow FY23 that saw EPS at $3.37. Fiscal 2025 earnings are expected to stabilize and rebound 3% at $2.88 per share. Plus, Albertson’s stock trades at just 8.2X forward earnings which is a 61% discount to its Zacks Consumer Products-Staples Industry average of 20.9X and well below the benchmark.
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Bottom Line
At the moment, Kroger and Albertsons’ stock both land a Zacks Rank #3 (Hold). Their stocks offer sound value to investors at current levels and are worth keeping in the portfolio especially as merger talks gain steam.
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The Kroger Co. (KR) : Free Stock Analysis Report
Albertsons Companies, Inc. (ACI) : Free Stock Analysis Report
Walmart Inc. (WMT) : Free Stock Analysis Report
