A Defensive Stock for Your Portfolio

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By Adil Yousuf

Stock markets fell globally on May 23 as weak data from China and Europe raised worries about slow global growth. The news came a day after US Federal Reserve chief Ben Bernanke broached the possibility of reducing stimulus that has buoyed investor confidence and fueled the US stock market rally.

While US markets appear broadly bullish, concerns about reduction in quantitative easing is expected to weigh on stocks in the months to come. Given the potential bearish impact on the overall market, it may be prudent to have defensive stocks in your portfolio, such as consumer staples companies, which lower volatility choices and at the same time can participate in market upswings.

Kroger Co. (NYSE:KR) is a company that perfectly fits the profile of a stock that offers some protection from the bearish trend in the general market. It is a consistent, slow and steady performer that allows investors to compound and accumulate wealth over a long period of time.

Kroger's dominant position 1 among the nation's largest grocery retailers enables it to sustain growth in its top and bottom lines. Kroger reported solid Q4 2012 results on March 7, 2013 — Earnings of 88 cents per share surpassed consensus estimate of 71 cents and jumped 76% year over year. Earnings growth was aided by strict cost control on selling, general, and administrative expenses.

Revenue of $24.2 billion was also up 12.8%. Same store sales growth for the quarter came in at 3%. The quarter marked the 37th consecutive quarter in which Kroger managed to increase its same store sales.

The company revamped its customer rewards program a few years back, which continues to resonate well with consumers. Kroger offers a rewards program where customers earn points for each dollar they spend at its stores. Once they reach a certain amount, they can turn those points into cash. This initiative has boosted same-stores sales, and thus, the bottom line.

Kroger has been working on increasing web traffic by engaging shoppers through mobile phone applications. Customers downloaded a record 500 million digital coupons in December 2012, and visits to its mobile site have more than doubled over the past year. This trend is likely to continue and will help Kroger increase revenue in the upcoming quarters.

The earnings picture isn't the only part of Kroger's story that is strong. The company has a bevy of other fundamental factors that support a bullish case for this grocer.

Based on Market IQ's proprietary Fundamental metrics Kroger is expected to Outperform its peer group. Market IQ places Kroger in the top right quadrant of the Quality/Value chart indicating high Quality and Investment Value (see below).

For more insights, visit the Market IQ blog.

The above Quality - Value chart consists of the following companies: Kroger Co (NYSE:KR), Loblaws Companies Limited (TSX:L.CA), and Whole Foods Market Inc. (NYSE:WFM).

The Company's Qualitative strength can be seen in multiple areas such as Revenue growth, Return on Equity (ROE), and growth in Net Income.

 

  • Since the same quarter one year prior, revenues have increased by 12.8%. Growth in revenue appears to have helped boost the earnings per share.
  • Current ROE of 35.54% has significantly increased when compared to its ROE from the same quarter one year prior when it was 14.92%. This is a signal of significant strength within the corporation.
  • Net income increased by 250.5% when compared to the same quarter one year prior.

 

The Company is favorably valued relative to its peers in the food & staples retailing industry, as it has a lower P/E, and a minuscule P/S ratio, when compared to the industry average (see below).

Additionally, Market IQ's Relative Risk metrics suggest that Kroger is likely to provide a smoother ride in terms of price volatility especially during turbulent times. High market Capitalization, historically stable earnings variability, cheap Valuation metrics, and insensitivity to business cycles and credit spreads make Kroger less risky relative to other companies.

Beyond the Risk metrics, investors should also note that the company has a very low short interest, coming in below 2%. This suggests that most investors are in agreement on Kroger's story in the near term.

Going forward, the outlook of the company looks promising 2. Double digit earnings growth is projected for the next quarter. Additionally, Analysts are expecting earnings growth of 9.2% over the next 5 years — much higher relative to previous five years. Consensus Earnings estimates for Kroger have ticked up over the past three months 3 with 7 out of the 14 analyst covering the company recommending a "Strong Buy" rating. A high Estimate Momentum is potentially a strong catalyst that could drive shares higher.

The economy is not devoid of risks, and Kroger is not immune to such adversities. However, a steady dividend stream 4 , cheap Valuation metrics and strong Earnings outlook create a compelling case to have Kroger as a long-term pick.

1New grocery sales data, obtained by WCPO Digital from Florida-based research firm, shows Kroger held a 40.1% market share in 2012.

2Looking ahead to fiscal 2013, Kroger continued to expect earnings in a range of $2.71 to $2.79 per share, on projected identical supermarket sales growth, excluding fuel, of about 2.5 to 3.5 percent. Street is currently looking for full-year 2013 earnings of $2.64 per share.

3Earnings estimates for Fiscal 2014 have increased from $2.62 per share 90 days ago to a current estimate of $2.77 per share.

4Kroger has been increasing dividends consistently over the past few years and offers a current dividend yield of 1.95%.

 

This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: KR , WFM

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