Berkshire Hathaway (BRK.B) CEO Warren Buffett is revered on Wall Street for his value-focused approach to investing, based around scouring the markets for quality companies trading below fair value. And for investors looking to follow in Buffett's billionaire footsteps, there's one top equity holding in the Berkshire portfolio that looks like a compelling value right now.
Specifically, U.S. grocery giant Kroger Company (KR) looks like a steal at current levels. For starters, KR is trading at only 10 times forward earnings, compared to a median valuation multiple of 17.8 times for the consumer staples sector. Plus, like all the best Buffett picks, the grocery chain offers a rock-solid dividend. Scooping up KR shares right now could be a golden opportunity for investors to grab a top-tier company at a bargain price - a move straight out of the Buffett playbook.
Here's a closer look at KR's stock performance, key financial stats, valuation metrics, and how it's paying back shareholders.
The Kroger Co. Overview
Kroger is a massive player in the U.S. food and drug retail scene, with a whopping 2,700+ stores spread across 35 states and Washington, D.C., and a market cap of $32 billion. Operating stores under their own name as well as Ralphs, Harris Teeter, Fred Meyer, and more, they're your one-stop shop for groceries, pharmacy goodies, fuel, health and beauty products, bling, and even online shopping.
The company is a consumer staples giant, meaning that it sells essential products that people need regardless of economic conditions. This makes Kroger a defensive stock, which can provide relative stability and income to investors even during market downturns.
Kroger's stock is trading just below $45, and the shares are nearly flat on a YTD basis. Like many dividend-paying stocks, KR has underperformed the broader market this year, as the S&P 500 Index ($SPX) has gained more than 24% in 2023. Adding to the pressure on KR specifically, there's still lingering regulatory uncertainty around the proposed merger with Albertsons (ACI), another major player in the grocery game.
Despite these challenges, Kroger comfortably beat expectations in its latest quarterly report. In Q3 2023, they reported an adjusted EPS of $0.95, beating the expected $0.90. Revenue also topped estimates, arriving at $33.96 billion.
However, the company reported a 0.6% dip in same-store sales (minus fuel), which was deeper than the expected 0.5% decline. Kroger blamed this dip on tighter consumer spending trends, with CEO Rodney McMullen noting that “our budget-conscious customers are under more significant spending pressure.”
For the full fiscal year 2023, Kroger expects earnings to range between $4.50 and $4.60 per share, with same-store sales ex-fuel projected to grow by 0.6% to 1%, a bit lower than the earlier forecast of 1% to 1.5%.
By comparison, Wall Street is targeting full-year EPS growth of 8% to $4.57, with revenue up 1% to $149.89 billion.
Warren Buffett's Investment in KR
Kroger isn't just any old supermarket; it's got the Buffett seal of approval. Yep, the investing maestro - who has famously been unloading some of his blue-chip stocks this year - still holds Kroger in his Berkshire Hathaway investment basket. Back in the fourth quarter of 2019, Buffett first jumped in with the purchase of 18.9 million shares, when the stock was trading in the mid-$20s range.
Buffett didn't stop there. He kept loading up on Kroger, and by the second quarter of 2021, Berkshire's KR stake peaked around at around 61.1 million shares.
But as they say, what goes up must come down. Berkshire's Kroger stake has slimmed down in the quarters since, with sales in the fourth quarter of 2021 and all four quarters of 2022. However, Buffett has been holding steady on KR so far in 2023.
Currently, KR accounts for 50 million shares of Berkshire's equity portfolio, making it the 16th largest stock holding for Buffett - or about 0.6% of the portfolio, outpacing names like Amazon (AMZN) and Snowflake (SNOW). The stake is worth over $2.2 billion, giving Berkshire a roughly 7% interest in the grocery giant's stock.
KR Looks Like a Good Value Buy Right Now
KR's relative share price underperformance this year has left the stock attractively valued, based on a few different metrics.
The current forward P/E ratio of 10x is a discount not only to the consumer staples sector median, but also to KR's own five-year average multiple of 11.83.
Plus, based on the price-to-sales and price-to-cash flow ratios, Kroger's priced at a healthy discount. KR's forward P/S ratio of 0.22 is well below the sector median of 1.15, and the P/CF ratio of 5.22 significantly undershoots the sector median of 13.40.
For investors, Kroger sweetens the deal with a dividend yield of 2.55%, backed by 16 consecutive years of higher payouts - showing their commitment to putting cash back in the pockets of their shareholders. The payout ratio is a low 25%, pointing to ample room for more growth in the years ahead.
Analysts expect more upside from KR in the year ahead, too. The average target price is $51.64, signaling a 15% premium to current levels. Among 15 analysts following the shares, 7 are shouting "strong buy," 7 suggest "hold," and 1 is whispering "strong sell."
With its attractive valuation and steady dividend yield, Kroger presents a compelling opportunity for investors seeking stability and income in these uncertain times. So, with the shares priced at a discount, it might be a good time for investors to cozy up to Kroger. After all, as Buffett himself once said, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
