Making new Buy rating calls at brokerage firms has to be a bit of a challenge when the market is effectively at all-time highs. So, what would make Kroger Co. (NYSE: KR) suddenly come with a new Buy rating now? Well, Merrill Lynch has raised its rating to Buy from Neutral and assigned a price target of $60 on the grocery giant.
The real rub here may be that Kroger is set to win in valuation against Wal-Mart Stores Inc. (NYSE: WMT) and over Target Corp. (NYSE: TGT).
Merrill Lynch analyst Robert Ohmes based his upgrade on an improving comparable sales outlook for Kroger. The call also follows a July 21 Kroger headquarters visit, as well as store visits. Ohmes now expects that offerings and growth in natural and organic and fresh foods will remain in place.
The report also cited traffic benefits from Kroger’s Fuel Rewards program. The company’s technology partnerships and investments are also expected to drive sales growth — namely, Dunnhumby, You Technology and QueVision. Additional gains are being seen from a post-integration learning from Harris Teeter, as well as opportunities in non-edible consumables coming in the next two to three years.
ALSO READ: Icahn “Extremely Pleased” With Family Dollar’s Acquisition
Where this call gets more than interesting is that Ohmes sees Kroger benefiting from price-to-earnings ratio (P/E) expansion to more of a premium valuation over both Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT). The base target of $60 now values Kroger at 17 times the Merrill Lynch fiscal 2016 estimate of $3.55 in earnings per share.
If you look at the consensus estimates and targets from Thomson Reuters, there is a value differential here. Walmart is worth 13.4 times expected 2016 (2015 calendar year) earnings, and Target is valued at 14.1 times expected 2016 (calendar 2015) earnings. Kroger’s same relative value for 2016 (2015 calendar) is currently 13.8 times the consensus earnings estimates. One key difference many investors may think of here is that the dividend yield differences are massive. Target yields 3.6% and Walmart yields 2.5%, while Kroger yields only 1.3%.
While Kroger shares were up almost 0.25 at $50.20 in mid-day trading on Tuesday, note that its 52-week high is $51.49 and the Thomson Reuters consensus price target is only $52.63. Still, Merrill Lynch does not even have the street-high target price, as one analyst has a $62 price target.
Other analyst calls elsewhere in Kroger prior to this were as follows:
- On July 15, BMO Capital Markets raised it to Outperform and with a $58 target.
- On June 25, Morgan Stanley started coverage at Overweight, also with a $60 price target.
- On June 23, Argus raised its target to $55 from $49.
- On June 20, Goldman Sachs raised its rating to Neutral from Sell.
ALSO READ: Have Investors Had Enough of Jeff Bezos Walmarting Business?
Cash Back Credit Cards Have Never Been This Good
Credit card companies are at war, handing out free rewards and benefits to win the best customers. A good cash back card can be worth thousands of dollars a year in free money, not to mention other perks like travel, insurance, and access to fancy lounges. See our top picks for the best credit cards today. You won’t want to miss some of these offers.
Flywheel Publishing has partnered with CardRatings for our coverage of credit card products. Flywheel Publishing and CardRatings may receive a commission from card issuers.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.