Market Overview

As Margin Threats Intensify, Kroger Shares May Be Past Their Expiration Date

Share:
As Margin Threats Intensify, Kroger Shares May Be Past Their Expiration Date
Related KR
Why Have Food Stocks Been Toast? Amazon, What Else?
A Reading Of Optimism And Fear Surrounding The Amazon-Whole Foods Deal
Benson Investment Management Company, Inc. ... (GuruFocus)
Related AMZN
Wall Street's M&A Chatter From July 21-23: WebMD, Asda, GraphIQ, Tesoro-Western Refining Logistics
Investors Bailing On Hedge Funds
One FANG, One 95+ Stock: Both 2% Off Buys With Earnings Monday (Investor's Business Daily)

There’s no reprieve in sight for Kroger Co (NYSE: KR), which last week fell 26.5 percent on lowered fiscal 2017 guidance and Amazon.com, Inc. (NASDAQ: AMZN)'s announcement that it will acquire Whole Foods Market, Inc. (NASDAQ: WFM).

Kroger's Take

For its part, the company told Benzinga, "We expect to continue to gain share" and that it will continue to adapt to the changing business landscape.

Want to get exclusive up-to-the-minute insight on the market? Sign up for Benzinga Pro.

Morgan Stanley analyst Vincent Sinisi is not so optimistic though, downgrading the company to Equal Weight with a price target reduced from $32 to $23.

Analyst's Commentary

Sinisi believes the lack of faith from investors is fair, given the uncertain outlook for the food retail sector as a whole (see Sinisi's track record).

“We believe there is increased structural margin risk within the sector and we have updated our estimates, [discounted cash flow] valuations and multiple bases accordingly,” said Sinisi. “We believe today's valuations are pricing in a no-growth scenario.”

The analyst forecasts near-flat earnings through fiscal 2020 and flat 2.6-percent EBIT margins afterward.

Sinisi stressed that he believed current grocery pricings with no growth are fair, although they will depend on how much the Amazon–Whole Foods combo will impact the sector.

Upside, Downside Risks

The noted upside and downside risks are essentially two sides of the same coin. Less-than-feared increases in competition would make for the upside and worse-than-feared margin pressures from greater competition characterize the potential downside.

Sinisi lowered price targets across the board for the food retail sector, including Smart & Final Stores Inc (NYSE: SFS), Sprouts Farmers Market Inc (NASDAQ: SFM), SUPERVALU INC. (NYSE: SVU) and United Natural Foods, Inc. (NASDAQ: UNFI), by an average of 18 percent.

Related Links:

Amazon Shouldn't Worry About Antitrust Law, For Now

Sprouts Farmers: Buy The Dip, This Could Be The Next Takeout Target

Latest Ratings for KR

DateFirmActionFromTo
Jun 2017Morgan StanleyDowngradesOverweightEqual-Weight
Jun 2017JP MorganDowngradesOverweightNeutral
Jun 2017Telsey Advisory GroupDowngradesOutperformMarket Perform

View More Analyst Ratings for KR
View the Latest Analyst Ratings

Posted-In: BZTVAnalyst Color News Downgrades Price Target Exclusives Analyst Ratings Interview Best of Benzinga

 

Related Articles (AMZN + KR)

View Comments and Join the Discussion!