Kroger’s valuation versus its peers
Kroger (KR) predicted that its fiscal 2017 earnings will be $2.19–$2.28 per share—compared to consensus estimates of $2.23. Currently, the company is trading at 16.9x the next 12-month EPS (earnings per share) as of March 3, 2016. This brings it to the lower side of its price-to-earnings range of 16.1x–19.6x since 2015. Currently, it’s cheaper than Whole Foods (WFM) and Sprouts Farmers Market (SFM). They’re trading at ~21x and ~29x—although for slower growth.
While the Market recently penalized Kroger for lower guidance on next year’s same-store sales, the company has a strong earnings forecast of 8% and 10% growth in the next two fiscal years. Kroger’s earnings forecasts are better than most of its peers. They’re expected to see slower growth. While Whole Foods’ adjusted EPS will likely see a deceleration of around 5% in the next 12 months, Sprouts is estimated to register 14% growth. Sprouts is a small company compared to Kroger. It terms of revenue, it’s around 3% of Kroger.
Are the valuations justified?
Kroger has a strong track record of growing sales and earnings. It’s an experienced and stable company. It responded quickly to customers’ demands by tweaking its store formats, introducing new products, and adding technology. Its aggressive acquisition strategy added a few successful brands and technologies under its portfolio. The Fresh Market (TFM) could be another acquisition. The acquisition of The Fresh Market would give the company another push into organics and higher-end products. Overall, Kroger is an excellent company. It’s an opportunity that shouldn’t be overlooked.
Investors looking for exposure to Kroger through ETFs can invest in the Vanguard Consumer Staples ETF (VDC). The company accounts for 1.9% of VDC.