Kroger (KR)

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Kroger Is A Winner

Summary:

~The Covid downturn has galvanized the Kroger business.

~Most investor do not appreciate that Kroger is very well run business that has compounded equity for a long time.

~In this new normal, Kroger has a long runway, and multiples will continue to expand.

I think COVID-19 has caused the biggest societal upheaval in my lifetime. I first thought we will recover quickly, but now I am changing my mind. I think it will take years to get back to where we were, hopefully, less than five, but certainly more than two.

What we are experiencing is a huge disaster. Similar to a tsunami, earthquake, or aftermath of a devastating war, only the devastation is mostly, not visible. Once the metamorphic ground stops shaking and the wind stops howling, the invisible fire is still burning, the ghostly snipers and land mines are still out there and the fog of confusion and disorientation is rolling in. Natural disasters destroy entire ecosystems forcing them to start again with new connections. We don't grasp the links among living things, from fungus to foxes, until long after the initial wave of devastation has passed and there will be likely several waves and aftershocks. COVID-19 has mowed down whole sections of the ecology of modern society. The airlines, cruise, hotel, and restaurant industries are probably the hardest hit by the coronavirus followed by retail, mall REITs, child care, elderly care, education, live entertainment, professional sports and so many others affected by social distancing and risk of infection.

Out of the fog, some businesses have come out as winners, stronger and faster. The tech giants like Amazon, Google, Facebook and Netflix for sure, who have benefited enormously from social distancing and shelter at home policies. Some clear winners like videoconferencing app, Zoom. Healthcare and Pharma for sure. Staples and Food, yes. One industry that has been resurgent is your neighborhood grocery stores. Costco has dominated. Of course Walmart, the biggest grocer in the US, and surprisingly Kroger (KR).

Food inflation (blue line) has picked up as seen in the graph below. This bodes well for grocers like Kroger, who now have pricing power. People will want to stay in their neighborhoods. This is good for Kroger. Until a vaccine is in widespread use COVID outbreaks will keep people close to home and their neighborhood grocery stores and gas outlets.

Kroger stock has gained a lot since it hit the low 20's in 2019 when the market got cold feet after Amazon's entry into the grocery market. But KR stock has fought back and is now back in the low 30.s. I believe the next few quarters will be gangbusters for KR and COVID related effects like pantry stocking and home cooking, energize cash flow growth, and operating margins. The stock price should follow, as historically the stock has correlated with median operating cash flow quite well with periods of over and undervaluation. By this metric, KR stock is still undervalued.



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