Warren Buffett bucks Wall Street with Kroger’s stock pick

Berkshire Hathaway Inc. BRK.B,
-0.44%

BRK.A,
-0.34%
bought nearly 11 million Kroger shares in the second quarter, according to its latest 13F report with the Securities and Exchange Commission. That brings its stake to 61.8 million shares, or about 8.3% of shares outstanding as of May 22, the end of Kroger’s fiscal first quarter.

Read: Warren Buffett’s Berkshire Hathaway buys Kroger, cuts shares in drugmakers

Wall Street doesn’t like Kroger

While Berkshire seems to like Kroger, which operates under the names of Harris Teeter, Fred Keyer and King Soopers, among others, as well as Kroger, Wall Street is more skeptical.

Within the Russell 3000 Index, which represents about 98% of the US stock market in terms of market capitalization, there are only 10 companies in the “food retail” industry group, according to FactSet. Here they are, sorted by market capitalization, with forward price / earnings ratios.

Company	Market capitalization. (millions of $)	P / E forward
Walmart Inc. WMT, -0.14%	$ 422,424	24.9
Kroger Co. KR, + 4.50%	$ 32,467	15.0
Albertsons Cos. Inc. ACI Class A, + 0.03%	$ 13,688	13.5
Sprouts Farmers Markets Inc. GDF, + 2.00%	$ 2,767	12.3
Grocery Outlet Holding Corp. GO, +1.07%	$ 2,565	27.9
Weis Markets Inc. WMK, + 0.90%	$ 1,502	N / A
Arko Corp. ARKO, -1.08%	$ 1,033	16.5
Ingles Markets Inc. Class A IMKTA, -0.53%	$ 917	N / A
Natural Grocers by Vitamin Cottage Inc. NGVC, + 0.98%	$ 264	N / A
Village Super Market Inc. Class A VLGEA, + 0.88%	$ 233	N / A
Source: FactSet

For comparison, the S&P 500 SPX index,
-1.14%
has a weighted forecast P / E of 21.4, according to FactSet.

There are no P / E ratios for four of these companies because consensus earnings estimates are not available. Three are not covered by any analysts interviewed by FactSet, while Natural Grocers of Vitamin Cottage Inc. NGVC,
+ 0.98%
is covered by a single analyst.

For the six companies covered by at least four analysts, here is a summary of ratings and price targets:

Company	Share “buy” reviews	Share neutral notes	Share reviews “sell”	Closing price – August 16	Consensus price target	12-month implied upside potential
Walmart Inc. WMT, -0.14%	75%	19%	6%	$ 152.34	$ 165.10	8%
Kroger Co. KR, + 4.50%	21%	54%	25%	$ 45.43	$ 38.49	-15%
Albertsons Cos. Inc. ACI Class A, + 0.03%	55%	40%	5%	$ 30.04	$ 25.28	-16%
Sprouts Farmers Markets Inc.	25%	50%	25%	$ 24.55	$ 26.50	8%
Grocery Outlet Holding Corp.	33%	60%	7%	$ 26.63	$ 34.36	29%
Arko Corp.	100%	0%	0%	$ 8.15	$ 13.25	63%
Source: FactSet

Of these six stocks, Walmart Inc. WMT,
-0.14%,
Albertsons Cos. ACI,
+ 0.03%
and Arko Corp. ARKO,
-1.08%
have majority “buy” or equivalent ratings, with Albertson trading well above the consensus target price.

Two – Kroger and Sprouts Farmers Markets Inc. SFM,
+ 2.00%
– have 25% of “sale” or equivalent odds. This is a dubious distinction, given that analysts who work for brokerage firms tend to avoid negative ratings. Only 5% of the S&P 500 have 25% or more “sell” ratings.

Here’s a look at the sales estimates (in millions) for the group of six grocery retailers for the calendar years up to 2025, with projected compound annual growth rates (CAGRs):

Company	Projected sales CAGR	East. sales – 2020	East. sales – 2021	East. sales – 2022	East. sales – 2023	East. sales – 2024	East. sales – 2025
Walmart Inc. WMT, -0.14%	2.2%	$ 556,334	$ 555,252	$ 569,243	$ 589,791	$ 607,056	$ 619,743
Kroger Co. KR, + 4.50%	2.2%	$ 131,133	$ 132,473	$ 134,412	$ 136,506	$ 141,695	$ 146,252
Albertsons Cos. Inc. ACI Class A, + 0.03%	1.8%	$ 68,664	$ 67,714	$ 68,412	$ 70,006	$ 72,540	$ 75,056
Sprouts Farmers Markets Inc. GDF, + 2.00%	5.6%	$ 6,468	$ 6,202	$ 6,665	$ 7,230	$ 7,826	$ 8,491
Grocery Outlet Holding Corp. GO, +1.07%	7.4%	$ 3,135	$ 3,104	$ 3,444	$ 3,842	$ 4,068	$ 4,477
Arko Corp. ARKO, -1.08%	18.3%	$ 3,911	$ 7,366	$ 7,749	$ 8,299	$ 8,713	$ 9,060
Source: FactSet

For sales and earnings, we use estimates for 2020, as some tax periods don’t even match calendar quarter end dates.

Kroger is in the lower half of this list.

Even if a company’s profits slowly increase, its earnings per share can be increased if it repurchases enough shares to reduce the average number of shares. Kroger announced a new billion dollar share buyback program in June. This means that the company’s board is confident that the supermarket chain will have enough free cash flow beyond what it will need to fund its planned digital transformation.

Here is a set of earnings per share estimates, with a projected CAGR:

Company	TCCA EPS projected	East. net income – 2020	East. net income – 2021	East. net income – 2022	East. net income – 2023	East. net income – 2024	East. net income – 2025
Walmart Inc. WMT, -0.14%	7.2%	$ 5.44	$ 5.96	$ 6.30	$ 6.85	$ 7.38	$ 7.70
Kroger Co. KR, + 4.50%	0.4%	$ 3.37	$ 3.10	$ 3.06	$ 3.13	$ 3.36	$ 3.43
Albertsons Cos. Inc. ACI Class A, + 0.03%	-1.1%	$ 2.79	$ 2.36	$ 2.21	$ 2.34	$ 2.48	$ 2.63
Sprouts Farmers Markets Inc. GDF, + 2.00%	6.7%	$ 2.48	$ 1.97	$ 2.08	$ 2.34	$ 2.90	$ 3.43
Grocery Outlet Holding Corp. GO, +1.07%	3.9%	$ 1.15	$ 0.88	$ 1.01	$ 1.14	$ 1.23	$ 1.39
Arko Corp. ARKO, -1.08%	24.7%	$ 0.27	$ 0.35	$ 0.43	$ 0.53	$ 0.67	$ 0.81
Source: FactSet

As you can see, Kroger should see its profits go down. Rival Walmart is expected to achieve a respectable EPS CAGR.

So a lot of things hinge on Kroger’s big bet that people will increasingly buy food online instead of browsing the aisles of stores. Buffett is a believer, and given the changing buying habits for non-food items, he may have picked another long-term winner.

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