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What Makes Kroger Such a Strong Company?

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A look at Kroger’s valuations

Kroger (KR) is currently trading at ~16.5x its NTM (next twelve months) EPS (earnings per share) of $2.24. It’s also operating near the low end of its 52-week PE (price-to-earnings) range of 15.4x–19x, making it cheaper than most of its supermarket and mass merchandising peers.

By comparison, Whole Foods Market (WFM), Sprouts Farmers Market (SFM), and Costco Wholesale (COST) are trading at higher multiples of ~22x, ~23x, and ~27x, respectively. Wal-Mart Stores (WMT) is currently trading at 16.7x.

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Are Kroger’s valuations justified?

Not only is Kroger cheaper than peers, but also it has a strong earnings outlook. Its EPS is predicted to grow by 8.2% over the next twelve months. Meanwhile, WFM, which is more expensive than Kroger, has been predicted to register an EPS decline of 5.5% over the same period.

Why such a strong company?

Kroger’s strong track record and robust future potential are supported by the company’s various initiatives, including tweaking store formats, introducing new products, and adding latest technology. The company has been quick to add organic and natural food products to its shelves to cater to increasing demands for such products. Its Simple Truth line has been a major hit among customers as well, grossing around $1.5 billion in total sales during fiscal 2016.

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For Fiscal 2017, the company is planning to expand its Simple Truth line by introducing its Simple Truth household, personal care, and baby products. According to a report by J.P. Morgan, Kroger could surpass Whole Foods Market (WFM) within the next two years and become the top seller of organic and natural foods in the US.

Kroger’s balance sheet and cash flow in fiscal 2016

Kroger has maintained a strong balance sheet along with a robust acquisition strategy. The company’s net total debt-to-adjusted-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio improved to 2.08x in fiscal 4Q16, as compared to 2.14x in fiscal 4Q15, despite the Roundy’s merger late in the fiscal year.

The company’s strong cash flow generation enabled it to make capital investments of $3.3 billion during fiscal 2016. It also repurchased $703 million in stock and returned $385 million to shareholders through dividends.

Investors looking for exposure to Kroger (KR) through ETFs can invest in the Guggenheim S&P 500 Equal Weight Consumer Staples ETF (RHS), which invests 2.5% of its total holdings in Kroger.

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