News of the Albertsons
ACI
and Kroger
KR
merger took up a lot of headlines in October. After all, the deal would merge two of the nation’s largest supermarket chains and create the fifth-largest retail pharmacy operator in the U.S.
Let’s see if it’s time to buy shares of either grocery retailer as we progress through 2023.
Merger Scrutiny
Pending litigation and arbitration, the merger will see Kroger acquire Albertsons for $34.10 per share in a deal valued at $25 billion. Both Albertsons and Kroger have argued that their merger will actually lower consumer prices and give them the ability to compete with the likes of Walmart
WMT
and Amazon
AMZN
.
Still, eyeing the individual prospects of both Kroger and Albertsons is very much ideal as there is much scrutiny surrounding the proposed merger.
-Store closures and layoffs are a concern with such a large number of stores being combined and many overlapping each other in proximity.
-Regulators and the Biden administration have stated they will scrutinize these types of mega deals across industries due to the effect they have on the economy, including labor markets.
-Consumer price spikes are also a concern as Kroger and Albertsons are already the largest and second-largest grocery operators in the U.S., on top of already higher inflation.
-Lawsuits filed by three states and the District of Columbia attorneys general led to a county court in Washington state pausing Albertsons planned $4 billion dividend payment as part of acquisition terms to its shareholders.
Recent Performance & Valuation
Kroger stock is only down -4% in the last year to largely outperform Albertsons -30% and the S&P 500’s -21% drop. However, when including dividends, Albertsons total return over the last two years is +66% to beat Kroger’s +44% and the benchmark.
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Trading around $20 a share and 70% below the acquisition price, Albertsons forward P/E of 7.2X is much lower than its industry average of 15.2X. In comparison, Kroger trades at $44 per share and 10.7X forward earnings which is just below its Retail Supermarkets industry average of 11.7X.
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From a valuation standpoint, Albertsons shares certainly look attractive, trading 51% below its two-year high of 14.9X and at a 29% discount to the median of 10.1X. In contrast, Kroger stock trades 34% beneath its two-year long high of 16.4X and at a 15% discount to the median of 12.6X.
Growth & Outlook
As it stands without the merger, Albertsons earnings are now expected to dip -1% in fiscal 2023 and be virtually flat in FY24 at $3.01 per share. Earnings estimates are slightly up for both FY23 and FY24 over the last 90 days.
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Sales are projected to be up 6% in FY23 and rise another 2% in FY24 to $78.01 billion. Fiscal 2024 would represent 29% growth from pre-pandemic levels with 2019 sales at $60.53 billion.
Turning to Kroger, earnings are forecasted to jump 12% in fiscal 2023 and rise another 1% in FY24 to $4.19 per share. Earnings estimates have gone up for FY23 over the last 60 days and remained unchanged for FY24 over the last quarter.
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On the top line, sales are projected to be up 7% in FY23 and rise another 3% in FY24 at $152.49 billion. Fiscal 2024 would be a 26% increase from pre-pandemic levels with 2019 sales at $121.16 billion.
Bottom Line
Both Albertsons (ACI) and Kroger (KR) stock land a Zacks Rank #3 (Hold) and they trade attractively relative to their past with solid top line growth expected. While operating and supply costs may be challenging in the current market environment, the top line growth shows Albertsons and Kroger should have the ability to sustain their bottom lines.
In the event the companies are allowed to merge, holding on to shares could also pay off for long-term investors. This could especially be the case for ACI shareholders with the stock still trading well below the acquisition price of $34.10 per share. With that being said the completion of the merger still wouldn’t be expected until 2024, which makes it important to monitor Albertsons and Kroger’s growth and valuation separately.
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