Friday's Kroger Sell-Off A Buying Opportunity?

“Fear creates opportunity,” Deutsche Bank analyst Shane Higginssaid as he maintains his Buy rating on Kroger Co KR with a $26 price target.

Kroger was hit hard over the past couple weeks after weaker-than-expected first-quarter earnings and the news of Amazon.com, Inc.'s AMZN acquisition of Whole Foods Market, Inc. WFM. However, Higgins noted, “Despite today’s challenging environment and despite fears that AMZN will over-run all traditional grocers, we believe that Kroger can still compete, and we see the recent sharp pull-back in the shares as a buying opportunity.”

Why You Should Believe In Kroger

• Higgins highlighted how Kroger is continuing to generate free cash flow, which should help the company invest in better margins, product selection and create a better customer experience. He expects Kroger to continue to gain market-share over the coming year either through weaker competition or through acquiring distressed assets.
• Kroger still has a tremendous scale in the industry and is on pace to generate approximately $120 billion in sales. Additionally, the retailer has been able to develop a strong private brand which helps lower costs.
• Kroger has a very loyal customer base, which provides the retailer with a large competitive advantage.
• Kroger continues to invest in its strong pharmaceutical business. Higgins noted, the company has been specifically “investing in related healthcare businesses, which are difficult for hard discounters or online competitors to penetrate.”

Following the news of the Amazon and Whole Foods merger, Kroger told Benzinga:

"Our associates have a relentless focus on our customers that has enabled Kroger to compete and win in an ever-evolving landscape for more than 134 years. As we’ve done in the past, we will evolve our business to deliver what our customers want and need today and into the future. We expect to continue to gain share and deliver value for our customers and shareholders."

Overall, Higgins believes Kroger still has a very attractive valuation.

Kroger Won't Have It Easy Over The Next Few Years, But Others May Struggle More Amazon's Acquisition Of Whole Foods Should Create Lower Prices, Offer Better Consumer Experience