Expected Price Gains for Grocery Store Stocks (SWY, KR, WINN, WFM, SVU, TFM, RDK, WMK, WMT)

Grocery stores and supermarkets get whipsawed by rising prices on food commodities, rising prices from food processing companies, and rising fuel prices on one hand and higher unemployment and stagnant wages on the other. If people didn’t need to eat, they probably wouldn’t.

About the only weapons the grocers have is selectively lowering prices and pushing their privately-labeled goods, which have a higher profit margin for the stores than the nationally-advertised brands. Stores have been unable, yet, to come up with a significant boost to their revenues and profits available from technology developments. The costs of implementing high-tech grocery shopping more than offsets any possible gains. It’s another problem grocers will have to find an answer to, along with rising costs, if they are going to grow.

We’ve looked today at a number of grocery store and supermarket stocks to try to determine where some hidden value may lie. The stores we’ve reviewed are Safeway Inc. (NYSE: SWY), The Kroger Co. (NYSE: KR), Winn-Dixie Stores Inc. (NASDAQ: WINN), Whole Foods Market, Inc. (NASDAQ: WFM), Supervalu Inc. (NYSE: SVU), The Fresh Market, Inc. (NASDAQ: TFM), Ruddick Corp. (NYSE: RDK), Weis Markets, Inc. (NYSE: WMK), and Wal-Mart Stores Inc. (NYSE: WMT). We’ve included Walmart because it gets more than half its $100+ billion in revenues from grocery sales, making it the largest grocery seller among this group.

All data from Yahoo! Finance, and current prices were gathered at about noon today.

Safeway Inc. (NYSE: SWY) has a median target price of $19.00 from 13 brokers. Shares are trading today at $19.28, about 1.5% above the target price. Safeway’s forward P/E is 10.37 and the company pays a dividend yield of 2.9%. The stock’s 52-week trading range is $15.93-$25.43, and at today’s price that’s about 21% above its 52-week low, posted earlier this morning, and 24% below the 52-week high. Safeway saw its average food basket price rise by 2.3% year-over-year in September, the same rate as Kroger and Supervalu. Sales of private label foods and gasoline gave the company a boost in the third quarter, but gross margins fell — never a good sign for a grocery. Look for a hike to the target price soon, now that Safeway has managed to bust through $19.

The Kroger Co. (NYSE: KR) has a median target price of $26.00 from 15 brokers. Shares are trading today at $22.83, for an implied gain of $3.17, or 14%. Kroger’s forward P/E is 10.57 and the company pays a dividend yield of 2%. The stock’s 52-week trading range is $20.53-$25.85, and at today’s price that’s about 11% above its 52-week low, posted earlier this morning, and 12% below the 52-week high. Kroger is Walmart’s leading competitor in grocery sales, with about $82 billion in 2010. The company has made a conscious effort to keep prices low, and that has affected margins negatively. If the company can figure a way to get those margins up, the stock price has room to grow.

Winn-Dixie Stores Inc. (NASDAQ: WINN) has a median target price of $10.50 from 5 brokers. Shares are trading today at $6.57, for an implied gain of $3.93, or 60%. Winn-Dixie’s forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $5.10-$10.08, and at today’s price that’s about 29% above its 52-week low, posted earlier this morning, and 35% below the 52-week high. Winn-Dixie didn’t quite meet its expected EPS loss estimate of -$0.42 when it reported earnings yesterday, but its same-store sales rose 3.3% and its revenues grew 3.1%. The company has a lot of headroom before it hits its price target or its 52-week high, and its big plus is a debt-free balance sheet.

Whole Foods Market, Inc. (NASDAQ: WFM) has a median target price of $75.00 from 15 brokers. Shares are trading today at $70.64, for an implied gain of $4.36, or 6%. Whole Foods’ forward P/E is 31.04 and the company pays a dividend yield of 0.6%. The stock’s 52-week trading range is $39.95-$74.45, and at today’s price that’s about 77% above its 52-week low, posted earlier this morning, and 5% below the 52-week high. The company is expected to report EPS of $0.41 on revenues of $2.36 billion after markets close today. Full-year EPS for the year ended in September is expected to be $1.93. Whole Foods has performed very well in a tight environment this year, and the company’s stock price reflects that. Expectations, as indicated by the high forward earnings multiple, might be somewhat optimistic but there’s still a 6% gain available when the company hits its target price.

Supervalu Inc. (NYSE: SVU) has a median target price of $8.38 from 10 brokers. Shares are trading today at $7.77, for an implied gain of $0.61, or 8%. Supervalu’s forward P/E is 6.03 and the company pays a dividend yield of 4.2%. The stock’s 52-week trading range is $6.26-$11.77, and at today’s price that’s about 24% above its 52-week low, posted earlier this morning, and 34% below the 52-week high. Like Safeway and Kroger, the average food basket price rose 2.3% at Supervalu in September. The company reported EPS of $0.28 two weeks ago, beating estimates. At the same time, the company lowered its full-year estimates on both earnings and revenues.

The Fresh Market, Inc. (NASDAQ: TFM) has a median target price of $43.50 from 8 brokers. Shares are trading today at $40.27, for an implied gain of $3.23, or 8%. Fresh Market’s forward P/E is 30.48 and the company does not pay a dividend. The stock’s 52-week trading range is $30.86-$46.85, and at today’s price that’s about 30% above its 52-week low, posted earlier this morning, and 14% below the 52-week high. Fresh Market shares started the month of September with a bang, but unfortunately the company only succeeded in generating short interest near 20% of outstanding shares. Stock price increases have stalled, and remain about where they were two months ago.

Ruddick Corp. (NYSE: RDK) has a median target price of $49.00 from 3 brokers. Shares are trading today at $43.75, for an implied gain of $5.25, or 12%. Ruddick’s forward P/E is 15.46 and the company pays a dividend yield of 1.2%. The stock’s 52-week trading range is $33.44-$46.00, and at today’s price that’s about 31% above its 52-week low, posted earlier this morning, and 5% below the 52-week high. Ruddick sold its thread-making and textile business to a private equity buyer last week for $180 million, leaving it with just its grocery operations. Shares got a short-lived boost on the sale, but shares continue to drift away from the 52-week high and the target price.

Weis Markets, Inc. (NYSE: WMK) has a median target price of $31.00 from just one broker. Shares are trading today at $39.45, about 21% above the target price. Weis’s forward P/E is unreported and the company pays a dividend yield of 3%. The stock’s 52-week trading range is $36.52-$42.20, and at today’s price that’s about 8% above its 52-week low, posted earlier this morning, and 7% below the 52-week high. Just looking at Weis’s hi/low it is pretty clear that the company needed to do something to try to break its share price out of that tight range. Last week it boosted its annual dividend from $1.16 to $1.20, and declared a special dividend of $1/share. The bounce to the share price lasted just one day.

Wal-Mart Stores Inc. (NYSE: WMT) has a median target price of $60.00 from 19 brokers. Shares are trading today at $57.06, for an implied gain of $2.94, or 5%. Walmart’s forward P/E is 11.62 and the company pays a dividend yield of 2.6%. The stock’s 52-week trading range is $48.31-$57.96, and at today’s price that’s about 18% above its 52-week low, posted earlier this morning, and 2% below the 52-week high. Walmart stock is trading near enough to its 52-week high that another good quarterly report could push the shares through that barrier. Walmart’s average food basket price rose 0.9% year-over-year in September, less than half as much than prices at Safeway, Kroger, and Supervalu stores.

Paul Ausick