Kroger (NYSE:KR) reports on its second quarter next week. The nation’s largest traditional grocery chain has seen its prospects improve as fears of an e-commerce-led takeover subside. KR stock has risen as the company has responded to the online threat. Now, as Kroger reports second-quarter earnings next week, investors will see whether this information fuels the recovery of KR stock or helps to place Kroger in a trading range.
For the second-quarter report, analysts predict consensus earnings of 37 cents per share on revenues of $27.96 billion. If this prediction holds, earnings will have fallen by two cents per share from year-ago levels. Revenue will rise by 1.3% over the same period.
Interestingly, the last earnings miss for KR occurred in this same quarter last year. KR stock tends to move following earnings. However, predicting whether it will make early buyers wealthier or give bargain hunters another low buy price remains difficult at this stage.
Kroger Knows How to Change With the Times
I first reported on KR stock 11 months ago. At that time, the merger between Whole Foods Market and Amazon (NASDAQ:AMZN) had just occurred. This reinforced an “Amazon will take over” sentiment with caused fear among brick-and-mortar retailers. This sent the stocks of Kroger and that of peers such as Walmart (NYSE:WMT), Target (NYSE:TGT), and Costco (NASDAQ:COST) on a steep downward trend.
By last fall, KR stock had lost more than half of its value, taking the stock to its 2014 trading levels. At that time, I encouraged traders to buy as the stock traded just above $20 per share and the forward price-to-earnings ratio had fallen below 10.
KR Stock Performed Better Over the Last Year
The stock saw a wild ride over the last year. The Kroger stock price moved beyond the $31-per-share level three months after I recommended the stock. It then fell briefly below $23 per share after the March earnings report. However, it again recovered.
Now, it has risen by nearly 60% since I recommended the stock last fall and trades near the $32 per share range. It has now reclaimed more than half of the loss it suffered before Amazon stoked fear across the sector. The PE ratio has also returned to levels close to its five-year average.
KR also continues its streak of dividend increases. Following its last quarterly report in June, Kroger’s board of directors approved a 12% dividend increase. This takes its annual dividend to 56 cents per share. It also marks the 12th consecutive year of dividend hikes for KR stock.
While the company has seen mostly good news, I would no longer call KR stock a bargain. In fact, I would consider today’s multiple a fair valuation. The forward PE ratio has now reached 15. It achieves this multiple with a predicted 3.9% profit growth rate this year and a 7.1% growth rate forecasted for next year.
Bottom Line on KR Stock
KR stock appears fairly valued at these levels, and the upcoming earnings report will likely drive where the stock goes next in the near term. Analysts expect slightly higher revenues and somewhat lower profits from year-ago levels.
Whatever happens, Kroger continues to manage itself well and respond appropriately to its competitive threats. Though Kroger remains a slow-growth enterprise, I see it as a strong competitor in the highly fragmented and competitive grocery business.
With fears of an Amazon takeover subsiding, investors have begun to see this and to give KR stock the credit it deserves. Right now, Kroger stock has reached a point where it offers investors little incentive to either buy or sell. Time will tell whether the earnings report changes that.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
