How can Kroger, a company that should be benefiting from cash-strapped consumers eating more meals at home, be faring so poorly? Price deflation. Yes, traffic to grocery stores is up, but frugal shoppers are increasingly going for stuff that's on sale (which hurts margins). And, of course, there's intense price competition from Wal-Mart (WMT), Supervalu (SVU) and Safeway (SWY). The result was a lousy quarter, with more headwinds to come.
Even the more bullish analysts were surprised by the quarterly results, but for investors with an eye toward the second half of next year, Kroger's stock looks to be on sale.
"Wow! The tide is out," wrote Jefferies & Co. analyst Scott Mushkin, who has a buy call on the stock. The severity of the challenges Kroger faced in the quarter caught Mushkin somewhat by surprise, but he believes the worst is now behind the company. "We think today's weakness presents a buying opportunity as the macro climate looks to have turned and Kroger is well-positioned to benefit," the analyst told clients Tuesday.
Since the sell-off continued into Wednesday, that buying opportunity remains intact, seeing as Kroger's stock is now even cheaper. At just nine times forward earnings, Kroger offers discounts of about 50% to the S&P 500 ($INX) and 33% to its own five-year average, according to Thomson Reuters. Shares trade at similar discounts on a trailing earnings basis, too.
Furthermore, by the price-earnings-to-growth (PEG) ratio, which measures how fast a stock is rising relative to its growth prospects, Kroger trades at discounts of about 35% and 20% to the market and its own five-year average, respectively. (Little wonder there: Kroger's stock is up just 3% since the March low versus 60% for the S&P.)
Analysts' average price target stands at $26. Throw in the 1.7% dividend yield and you get an implied upside of more than 33% in the next 12 months or so. If Mushkin is right and the third-quarter was indeed Kroger's low-water mark, that return should be achievable.