Shares of Kroger (KR) are under pressure on Tuesday after BMO Capital downgraded the stock to Market Perform as valuation expansion beyond current levels would likely require stronger grocery market share trends and/or upward earnings revisions. More bullish on the name, however, Jefferies upgraded Kroger to Buy, citing Albertsons (ACI) deal closing, path to double-digit earnings and 30%-plus free cash flow accretion potential.
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BUY KROGER: Jefferies upgraded Kroger to Buy from Hold with a price target of $73, up from $54. The firm says that if the if the Albertsons deal closes, it sees a path to double-digit earnings and 30%-plus free cash flow accretion potential via right-sizing of Albertsons’ working capital. If the deal does not close, Kroger keeps $6B of debt it raised for the merger, acting as support for the stock and driving earnings upside via share buybacks, Jefferies tells investors in a research note. Concurrently, Kroger’s foot traffic trends have been sequentially improving, while its fuel business is structurally more profitable now than pre-pandemic, “an incremental kicker,” adds the firm.
MOVING TO THE SIDELINES: Meanwhile, BMO Capital downgraded Kroger to Market Perform from Outperform with an unchanged price target of $60. The firm says that while the company remains on track to reiterate earnings targets for fiscal 2025, valuation expansion beyond current levels would likely require stronger grocery market share trends and/or upward earnings revisions. BMO adds that the pending Albertsons merger still lacks clarity, but that it estimates the potential accretion from a deal or no-deal scenario is now largely reflected in Kroger shares.
The firm believes Kroger’s positioning in the industry may allow it to continue managing the competitive environment with stable gross margin, particularly as the company is turning the corner with incremental digital margins. With valuation at 13-times 2-year forward price-to-earnings, BMO sees the stock as fairly valued. In order to support further valuation expansion, Kroger would need to demonstrate stronger grocery market share trends, the firm adds.
PRICE ACTION: In morning trading, shares of Kroger have dropped about 1% to $59.68.
“Street Fight” is The Fly’s recurring series of exclusive stories that highlight a stock or sector that is in focus amid divergent views from Wall Street analysts.