Kroger's stock upgraded, as an Albertsons deal or no deal would be a good thing

By Tomi Kilgore

BMO Capital turns bullish two days before the grocer reports earnings

Shares of Kroger Co. got a nice lift on Tuesday, after BMO Capital's Kelly Bania turned bullish on the supermarket chain, and not just because she's upbeat about earnings due out in two days.

Bania said she also believes that whether Kroger's (KR) $24.6 billion deal to buy fellow grocer Albertsons Cos. Inc. (ACI) falls through or not would be a good thing.

Kroger's stock (KR) climbed 1.9% in morning trading.

Even with the gain, the stock has still corrected 10.1% since reaching a two-year closing high of $57.82 on April 2, while the Consumer Staples Select Sector SPDR ETF XLP, of which Kroger is a component, has gained 2.8% over the same time.

"The stock has pulled back on fear of increasing price investments across the space, but we believe [Kroger's] positioning in the industry allows it to continue managing the competitive environment with stable [gross margin percentages]," Bania wrote in a note to clients.

Bania raised her rating on Kroger's stock to outperform and lifted her price target to $60. Her target is now above the average target of the 18 analysts surveyed by FactSet who cover Kroger of $58.09.

More than just dispelling worries about the fiscal first-quarter earnings report scheduled for release before the June 20 open, Bania is bullish about the Albertsons deal, whether it happens or not.

"[W]e see the pending [Kroger-Albertsons] deal as a win-win under either a deal or no-deal scenario, but we estimate higher year-one EPS accretion under a no-deal scenario," Bania wrote.

The good news is, she believes there's a 70% chance of a no-deal, and a 30% chance of a deal.

Under a no-deal scenario, Bania believes Kroger's cash-per-share could jump to about $12 to $13 from the current $2.30.

She said this could boost earnings per share in the low-double digit percentage range, helped by increased share repurchases, compared with a mid-single digit percentage EPS boost in year one if a deal closes.

For Kroger's first-quarter report, the average estimates of analysts surveyed by FactSet are for EPS of $1.36, net sales of $44.85 billion and flat same-store sales.

Kroger has beat EPS expectations the past 17 quarters, and has topped sales expectations 11 times over that period.

And during that time, the stock has gained on the day earnings were reported 10 times, by an average of 6.5%. The average decline on the seven times it fell the day of earnings was 3.2%.

-Tomi Kilgore

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06-18-24 1030ET

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