This Stock Has Gained 113% Over 3 Years – Is It Still a Buy?
The market has had a difficult period this year, with the S&P500 down about 20% in 2022. However, even when difficulties arise, some stocks do well. Such stock is Kroger (KR 1.51%), which gained about 6% during this period. While that may seem disappointing, consider that the performance beat the overall market.
Over the past three years, Kroger’s stock has more than doubled, rising about 116%, nearly four times the gain of the S&P 500.
While it’s tempting to jump on the bandwagon, you shouldn’t blindly invest in a stock simply based on past success. To determine if Kroger shares still present a good opportunity, it’s time to dig deeper into the company’s valuation and growth prospects.
You can use various measures to evaluate the price of a stock. While it’s tempting to look at the stock price, you should look at objective metrics like the price-to-earnings (P/E) ratio. You can use this metric to compare how much investors are willing to pay for a company’s earnings and compare that number historically and to other companies in the industry.
The rapid rise in Kroger’s share price means that shares are now trading at a P/E multiple of over 16 from less than 10 times in 2019. It is also important to compare Kroger’s P/E to similar companies. Albertsons companiesa food and pharmaceutical retailer, sells at a multiple of 18 while walmart has a 26 P/E. Therefore, while the stock has become relatively more expensive, it is selling at a discount to its peers.
The key question is whether Kroger shares justify this higher relative valuation from a few years ago based on its growth prospects.
Kroger became a major food, pharmaceutical and gas retailer. The retailer sells basic everyday items, so it’s natural to expect steady business no matter what’s happening in the economy. It certainly helped the company during the pandemic.
Consumers have many options, however. But pushing its “lead with fresh and accelerate with digital” has been a powerful combination to stay competitive with companies like Amazon and walmart. For its first fiscal quarter (ended May 21), comparable store sales (coms) excluding fuel increased 4.1%. Kroger’s adjusted operating profit was $1.6 billion, up 16.4% from a year ago.
Management gave a more optimistic forecast for this year. He expects comps to rise 2.5% to 3.5%. Previously, the company was calling for a 2-3% increase in comps.
Like other retailers, Kroger has faced higher supply chain costs. The company has a vertically integrated supply chain that helps mitigate them. However, while the company has increased this year’s adjusted operating profitability expectations by $100 million to a range of $4.3 billion to $4.4 billion, the revised figure remains relatively stable compared to previous estimates. $4.3 billion in fiscal year 2021.
Kroger has a lot to do. It has generated consistent sales growth and its profits have increased. However, with higher stock valuations and a cautious operating profit outlook for this year, I would hold off on any buying at this time.