Kroger Attractive Long Term, Remains On Goldman's Conviction Buy List

On September 9, Kroger Co KR reported robust Q2 results, which Goldman Sachs’ Stephen Tanal believes demonstrated that the company is executing well against a difficult environment.

Tanal maintains a Buy rating on the company, while lowering the price target from $40 to $39.

Ahead Of Competition

“The company is far ahead of the competition in its use of data and is proactively investing in price as it has in each of the last 12 years in categories where it matters to drive traffic,” the analyst mentioned.

Tanal noted that management acknowledged a “pain point” for some investors by cutting the capex budget by $500 million for 2016 and 2017 from several projects that did not have critical deadlines.

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The company also mentioned these funds would be reinvested in buybacks in the near term.

Attractive Long-Term Investment

“We like this move, because we think the stock is attractive at these levels as a long term investment, and we do not take issue with KR’s seemingly elevated level of capital expenditure,” the analyst stated.

Tanal pointed out that Kroger’s disciplined approach to capital allocation was evident in the company’s consistent and stable cash-on-cash returns.

“More importantly, this massive company has consistently found productive ways to deploy upwards of $4 billion annually,” the analyst went on to say, while adding that this suggested that Kroger “still has the ability to create more than $400+ million of incremental OCF annually using internally generated funds.”

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