Kroger (NYSE:KR) stock was one of a few names that saw a tailwind, not a headwind, from the novel coronavirus. And given the massive stockpiling from earlier this year, that’s no surprise. When the pandemic first spread across the U.S., households headed to grocery chains like this one en masse to hoard for lockdown. But, despite “shelter-in-place” fast coming to an end, you didn’t miss the boat. There’s plenty left on the shelf for investors looking at this stock today.
Granted, shares have held steady since April, trading around $32 per share, while markets have rallied since then. But, that doesn’t mean this company’s shares are heading lower as hard-hit stocks trend higher.
Why? This company’s current windfall may not be a one-and-done event. Many households could continue shying away from discretionary retail. But everyone has to eat. Essential businesses like grocery chains will still see strong sales, meaning the company’s near-term earnings boost won’t dip much from here. Coupled with low valuation, shares remain a strong buy at current prices.
Kroger After the Pandemic
I get that many investors are skeptical about this stock. Every state that went on lockdown has either eased or lifted restrictions. Still, we aren’t going “back to normal” immediately. Many state and local governments have made masks mandatory for now. Add in other “social distancing” measures, and its clear we aren’t out of the woods just yet.
This “new normal” may impact many bricks-and-mortar businesses. Discretionary retail could continue to face challenges. But, for essential businesses like grocery stores, this transition phase may sustain their recent strong performance.
How so? Firstly, if discretionary retail remains affected, those dollars are going to go somewhere. Yes, the U.S. household savings rate skyrocketed during lockdown. But, even as more outside activities (travel, dining, shopping) are back on the table, U.S. households remain insecure about near-term economic prospects.
This may mean continued belt tightening. But grocery budgets can only be cut so much. In other words, expect this company’s recent sales strength to continue.
Secondly, even as restaurants reopen, dining out may not immediately rebound. The increase in cooking meals at home could continue, as lockdowns broke many Americans’ prior food consumption habits.
These factors bode well for Kroger’s stock. We may not see earnings growth in 2021 like we’ve seen this year. But, if they can hold onto most of this increased business, shares could move further, as valuation today remains dirt cheap.
Low Valuation Could Mean Further Room to Run
Based on analyst estimates, earnings are set to rise 14.6% this year. But in 2021, earnings are set to dip slightly. In short, today’s tailwind is going to dissipate. But not by much.
This may be the silver lining with KR stock, and the reason why shares won’t fall lower from here. With a low valuation, the stock has plenty of room to move higher.
Right now, the stock changes hands for a forward price-to-earnings (P/E) ratio of 13.
By comparison, Walmart (NYSE:WMT) trades for 24 times forward earnings. Costco (NASDAQ:COST) trades for 32 times forward earnings. Granted, both of these companies have stronger growth runways than KR stock.
Yet, even after accounting for lower growth levels, this grocery chain’s shares are cheap. I don’t see valuation skyrocketing to Walmart or Costco levels. But, multiple expansion could still be in play.
Also, consider the stock’s 2% yield. While not the highest yielding stock out there, the strength of this dividend (14 years of growth), coupled with low interest rates, may make shares a temping opportunity for income investors.
Sure, there’s no guarantee this will happen. The pandemic could continue subsiding sooner than previously anticipated. Also, the rise of online grocery shopping could affect the company’s top and bottom lines.
However, as a recession-resistant business, the company’s sales should hold steady, whether tough economic times continue, or if we wind up experiencing a V-shaped recovery.
KR Stock Has Plenty Left on the Shelf
Many still believe Kroger has run out of room to run. After shares rallied during the pandemic, they’ve tread water, as investors wait for earnings to fall “back to normal.” But a “back to normal” scenario still remains far down the road.
Lockdowns are ending. Nonessential businesses are starting to reopen. But Americans who have adapted to the “new normal,” may stick to their changed habits. This doesn’t bode well for discretionary retail. But it could mean continued strong performance for essential businesses like this one.
With valuation low, and room to run, there’s plenty left on the shelf with KR stock. Consider shares a buy at today’s prices.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.