While the hype over artificial intelligence (AI) has driven up several technology players, investors looking to kill two birds with one stone may have a surprise pick in grocery giant Kroger (NYSE:KR). More known for its focus on the national food supply chain, its management team recently emphasized the utility of integrating AI protocols in the business. I am very bullish on KR stock.
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AI Comments Raise Intrigue for KR Stock
Last month, Kroger released its results for the first quarter of 2023, delivering solid results. Per TipRanks reporter Shrilekha Pethe, the company posted adjusted earnings per share of $1.51, beating the EPS of $1.45 posted in the same period last year. Also, the figure beat analysts’ consensus EPS estimate of $1.46. Still, for the techies, the real news may have come from AI-related commentary during the earnings call.
At the time, Kroger Chairman and CEO Rodney McMullen noted that “for years, Kroger has been at the forefront of using data and analytics, including artificial intelligence, to build a better customer and associate experience. By applying our data and AI-based personalization, we can better understand what truly matters to our customers and deliver more targeted and effective experiences.”
According to Bloomberg, McMullen mentioned AI a total of eight times, drawing much enthusiasm from watchful investors. To be sure, the AI hype didn’t save KR stock from sliding following the Q1 disclosure. Wall Street might not have liked that sales hit $45.2 billion rather than the consensus estimate of $45.3 billion.
Nevertheless, the bigger picture seems intriguing for KR stock. Shares are up modestly (about 5%) since the beginning of this year, and with Kroger focused intently on leveraging the power of digital intelligence to boost sales and the customer experience, KR seems much more relevant than the competition.
Still, the beauty about Kroger is that even without the AI component, KR stock seems a Strong Buy.
Monetary Policy Incentivizes Kroger
Easily one of the most remarkable and simultaneously frustrating elements of the post-pandemic ecosystem is the labor market. On the one hand, the tightness of the workforce means that whoever wants an employment opportunity can get one. On the other hand, its soaring resilience this year equates to stubborn inflation. Still, a more aggressive shift in monetary policy may end up incentivizing speculation toward KR stock.
While the headline print of the June jobs report came in lower than expected, investors must consider two factors. First, the unemployment rate declined (albeit slightly). Second, wage growth has remained stable and robust on an adjusted month-to-month basis. Combined with the average length of the work week slightly increasing from the prior month, at scale, more dollars continue to chase after fewer goods.
In turn, the Federal Reserve will probably raise interest rates after pausing rate hikes last month. It’s also possible that policymakers might not be able to engineer gentle disinflation. Rather, higher borrowing costs may disincentivize business growth. In turn, society could suffer mass layoffs, as happened last year.
Nevertheless, in this ugly scenario, KR stock just might cynically benefit. While consumers can cut out discretionary goods and services – jewelry, streaming subscriptions, etc. – it’s a much more different proposition regarding the essentials, like food and water.
Don’t Ignore the Value Proposition
To be sure, no one will confuse KR stock as an exciting enterprise. Almost surely, investors will not see the kind of stratospheric gains in Kroger shares that they might in AI-specific tech enterprises. However, given the length of time that has passed in the AI hype train, several direct players are well overvalued. Fortunately, for the grocery stalwart, the opposite is true.
With the possible coming pivot in monetary policy, astute investors ought not to ignore the value proposition of Kroger. Right now, the market prices KR stock at a forward earnings multiple of 10.3 times. That’s rather low considering the grocery and food retail sector’s average forward multiple of about 15x
Even better, since Kroger will likely benefit from the “trade-down effect” (explained here) should monetary policy tighten and consumers begin focusing only on the essentials, this is a credible projected-earnings discount rather than a value-trap metric.
Is Kroger Stock a Buy, According to Analysts?
Turning to Wall Street, KR stock has a Moderate Buy consensus rating based on six Buys, five Holds, and zero Sell ratings. The average KR stock price target is $51.91, implying 12.3% upside potential.
Also, on TipRanks, KR stock has a ‘Perfect 10’ Smart Score rating. This indicates strong potential for the stock to outperform the broader market.
The Takeaway: KR Stock Should Benefit Either Way
As an incorporator and beneficiary of AI technologies, Kroger might distinguish itself from the competition. By doing so, the company will also help establish AI as a legitimate business catalyst rather than a pretty tech experiment. However, even if the AI narrative falls flat, the coming shift in the economy should cynically benefit the grocery giant. Either way, KR stock will likely win.
