Kroger - Growth & Income

Zacks Investment Research
Posted: Dec 05, 2012 12:00 AM
The Kroger Company (KR) has watched all 12 earnings estimates for 2012 move higher in the last 7 days, after this grocery retailer raised its full-year earnings guidance during its third-quarter report. With a decent dividend yield of 2.5%, an impressive guidance for 2012 and a long-term expected earnings growth rate of 9.1%, this Zacks #2 Rank (Buy) offers an attractive investment opportunity for investors seeking both growth and income.

Strong Third Quarter

On November 29, Kroger reported third-quarter earnings of 46 cents, beating the Zacks Consensus Estimate by 7.0% and last year’s earnings by 39.4%. This marked the fourth straight quarter with a positive earnings surprise. Favorable cost management and share repurchase activities aided the bottom-line improvement.

Total revenue grew 5.9% year over year to $21.8 billion in the quarter, which was ahead of the Zacks Consensus Estimate of $21.7 billion. This performance benefited from positive identical supermarket sales growth and expansion of stores. The company’s identical supermarket sales grew 3.2% to $16.1 billion, marking the 36th successive quarter with an increase.

Impressive Guidance

Kroger’s healthy results prompted management to raise the outlook. The company now expects 2012 earnings between $2.44 and $2.46 per share, up from the earlier forecast of $2.35 to $2.42.

Kroger’s customer-centric business model provides a strong value proposition to consumers. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth. The company expects identical supermarket sales growth between 3.0% and 3.5% in the fourth quarter of 2012.

Dividend Payout

Kroger has been increasing its dividend every year since 2006. The company increased its quarterly dividend in September by 30%, bringing the annualized payout to 60 cents per share from the earlier level of 46 cents. The quarterly dividend increased from 11.5 cents to 15 cents, reflecting a decent annual dividend yield of 2.5%.

Surge in Earnings Estimates

Over the past 7 days, all 12 estimates for 2012 were revised upward, lifting the Zacks Consensus Estimate by 2.5% to $2.47 per share. This indicates year-over-year growth of 26.2%. The Zacks Consensus Estimate for 2013 increased by 1.5% to $2.63 per share as 13 of 19 estimates moved upward. This reflects a year-over-year increase of 6.5%.

Reasonable Valuation

Kroger currently trades at a price-to-sales (P/S) multiple of 0.15, reflecting a 34.8% discount to the peer group average of 0.23. In addition, the stock looks attractive as it has a trailing 12-month return on equity (ROE) of 31.9%, much above its peer group average of 17.9%.

Chart Showing a Consistent Advance

Shares of Kroger have been consistently rising since mid-September 2012 and jumped steeply following the third quarter results. Moreover, the stock is currently trading above its 200-day and 50-day moving averages, which stand at $23.07 and $24.40, respectively. Volume is strong, averaging roughly 4,565K daily. Kroger has outperformed the S&P 500 over the last 3 months.

Based in Cincinnati, Ohio, Kroger is a retailer, manufacturer and processor of variety of food for sale in its supermarkets. It operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States. The company currently has a market cap of $13.8 billion.

Want More of Our Best Recommendations?

Zacks' Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Then each week he hand-selects the most compelling trades and serves them up to you in a new program called Zacks Confidential.

Learn More>>

KROGER CO (KR): Free Stock Analysis Report
To read this article on click here.