This Stock Has Way More Upside Than You Think

Kroger Co. (NYSE:KR) may be down but it is not out. Ever since Inc. (NASDAQ:AMZN) officially entered the grocery space with its Whole Foods Market, Inc. (NYSE:WFM) acquisition, a cloud of doom and gloom has settled over the industry.

The arrival of Amazon struck fear into the hearts of investors leaving even the most well-established industry leaders to suffer.

KR stock is one such grocer that has seen its share price decline more than 40% so far this year.

While it’s true that the Amazon/Whole Foods duo is likely to disrupt the industry, I think KR stock has been unfairly punished.

Investors have been overwhelmingly bearish on Kroger stock and despite the fact that the firm pays out a respectable dividend and has a pretty solid future plan in place, many believe KR is a value trap.

I think the current Kroger stock price represents a buying opportunity that gives traders a low entry point into a chain that looks likely to survive the Amazon effect in the grocery space.

The Amazon Effect
It’s definitely not great news when Amazon starts building a presence within your industry, that much I’ll agree with. But just because the e-commerce giant has leveled its department store rivals doesn’t mean the same fate awaits Kroger.

Perhaps the most important thing to consider is that grocers like Kroger knew this was coming. Unlike their department store counterparts like Macy’s (NYSE:M) and Sears Holdings Corp (NASDAQ:SHLD), grocers had a pretty good idea of what was coming. Amazon has been slowly building out its food offerings, and rumors about the online shopping giant’s entry into the space were rife for years leading up to the Whole Foods acquisition. Amazon’s move into grocery was no big surprise, as Kroger CEO Rodney McMullen pointed out himself.

Changing With the Times

So, with the knowledge that a giant like Amazon was on its way, you can expect that Kroger has been preparing itself. As my colleague Will Healy pointed out, Kroger has some experience in differentiating itself. The company is one of just two nationwide grocery-only chains and the firm consistently outperforms its only competitor in the space, Albertson’s.

What’s good about Kroger’s position is that the company has a strong brand name that people associate with good value and plenty of choice. While I’m willing to agree that the grocery space is in the middle of a shift, I don’t think that traditional grocers will be completely pushed out of the equation. People prefer to shop for food in person at a dedicated store that gives them variety and choice and I don’t think that will go away completely, at least not in the next decade.

However, as the industry shifts, Kroger will need to keep its offerings current and I think so far the firm appears to be doing that. Kroger operates an online shopping business called ClickList that still has a lot of room to grow. Only 640 of it’s roughly 2,800 stores offer ClickList, but I think we’ll see Kroger start to build out that offering further in the year to come. The firm is also working on an in-store meal-kit service that can compete with the likes of Blue Apron Holdings Inc. (NYSE:APRN) and a restaurant concept that will expand its addressable market.

A Good Position

The other reason I like Kroger stock is that the firm is very well positioned in the grocery market. The company has nearly 3,000 stores across the country, the majority of its customers live within a 2.5 mile radius and the firm has been able to keep its prices toward the low-end of the spectrum. That makes for a pretty wide moat if you ask me because it gives customers convenience, competitive pricing and wide variety, something most other stores can’t offer.

With its massive store footprint comes a large marketshare as well. Kroger is the number two supermarket chain in the country after Wal-Mart Stores Inc. (NYSE:WMT). The company enjoys 8.9% of the nation’s grocery market– that’s more than double Amazon and Whole Foods’ market share combined.

Not only is that a strong position with which to weather a storm, but it’s a great position to make an acquisition. 8.9% is a big number in the grocery space, but it shows just how fragmented the industry is. More consolidation is coming for U.S. grocers, and I think Kroger will be a big beneficiary of that shift. The Amazon/Whole Foods partnership will weaken some of Kroger’s smaller competitors like Trader Joe’s and Sprouts Farmers Market (NASDAQ:SFM), which could create acquisition opportunities.

The Bottom Line

Kroger isn’t without risk. The firm is definitely susceptible to Amazon’s advances into the industry, especially if it falls behind with its digital presence. The company is also carrying a large amount of debt which management will have to work on paying down. However, bearish Kroger news would have you believe that this is the beginning of the end for the supermarket. Instead, I think value investors should take a position in KR stock while it’s beaten down. Not only will Kroger stock price increase as the firm proves itself against Amazon, but Kroger offers investors a 2.45% dividend yield- a pretty nice reward for waiting out the storm.

— Laura Hoy


Source: Investor Place