Kroger’s growing empire: Is this Warren Buffett stock a no-brainer buy?

The largest grocery chain in the country is about to expand. Kroger (NYSE:KR) will acquire the second largest stand-alone chain, Albertson (NYSE: ACI)in a $24.6 billion deal that will create a huge supermarket giant.

The combined company will generate $210 billion in annual sales and have approximately 5,000 stores and 700,000 employees, putting it a striking distance from walmart. Yet, as it will also reduce competition in some markets, as Kroger and Albertsons have overlapping geographic spreads, it is likely that this merger will come under intense antitrust scrutiny and likely lead to asset sales.

At Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) owns a 7.3% stake in Kroger’s worth about $2.26 billion. Let’s see if it’s worth investing in this grocery store chain as well.

Image source: Kroger.

Power of concentration

Kroger is the largest pure play supermarket with $138 million in revenue, although Walmart, with $265.8 billion in combined Walmart and Sam’s Club grocery sales last year, generates more money. That’s why the Albertson merger of $71.9 billion in grocery sales across all of its banners makes the supermarket merger such a potent threat.

Grocery

2021 turnover

Market share %*

walmart

$265.8 billion**

21.6%

Kroger

$137.9 billion***

8.8%

Costco

$77.3 billion

6.4%

Albertson

$71.9 billion+

4.7%

Ahold Delhaize

$53.7 billion

4.3%

Amazon

$19.2 billion++

2.4%

*Market share in total dollars spent. **Walmart and Sam’s Club. *** Kroger, Harris Teeter, Ralphs and Fred Meyer. +Albertsons, Safeway, Acme, Kings, etc.++Online and physical Amazon stores, including Whole Foods Market.

Because a combination of Kroger and Albertsons would give the grocery giant considerable leverage to negotiate prices with suppliers, some fear it may be able to raise prices at a time when consumers are already grappling with rising food and energy costs.

An estimated 60% of all grocery sales are concentrated in just five companies: Walmart, Kroger, Amazon, Albertsons and Ahold Delhaize. This does not include Costco, Wholesale BJ Clubor dollar stores like General dollar and dollar treewho invest more in fresh food and consumables.

Kroger, however, says it intends to invest about $500 million in synergies realized through the merger to reduce prices for consumers, with an additional $1.3 billion to “enhance the experience customer” in the Albertsons chain, and an additional $1 billion to raise workers’ wages. and benefits.

Become the place of shopping

Albertsons was taken private in 2006 by Cerberus Capital Management and brought back to the public markets in 2020. Since then, Albertsons stock has gained 70% in value compared to a 15% gain by the S&P 500 (Kroger rose nearly 35% since then).

Both Albertsons and Kroger have invested heavily in their online presence and digital capabilities. Albertsons has extensive omnichannel and fulfillment infrastructure, such as nearly 2,100 curbside collection and delivery points, while its Albertsons for U loyalty program has 31 million members.

Kroger has similar competitive advantages and has already revamped its own Boost by Kroger loyalty program, which is a paid platform similar to Walmart+ or Amazon Prime.

Kroger will pay $34.10 per share for Albertsons, a 32.8% premium to Albertson’s closing price on Oct. 12, before the merger was announced. The final payment amount may also be reduced depending on the number of stores Albertsons must sell to obtain regulatory approval. Albertsons will pay its shareholders a special cash dividend of approximately $6.85 per share.

Is it worth it

The overall value of the supermarket business, however, is that despite very low margins, it is a simple and sustainable business. Mark Twain once observed, “buy land — they don’t care about it anymore,” a sentiment that can also be applied to grocery stores, because people will always need to eat. Food stocks can be a very good buy.

And Kroger’s stock looks like a good value. The shares are trading at 13 times trailing earnings, 10 times next year estimates and a fraction of sales. With only 15 times the free cash flow it produces, Kroger is not a cheap stock, but still a discounted value.

Analysts forecast steady revenue growth for the supermarket giant, expecting sales to hit $159 billion by 2026, and had a price target of $52 on its shares, suggesting a 21% upside over the next year.

This merger won’t be quick and could see significant concessions offered to pass regulatory review, but Kroger is a grocery star that investors should consider putting in their portfolios.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Rich Duprey has no position in the stocks mentioned. The Motley Fool has positions and recommends Amazon, Berkshire Hathaway (B shares), Costco Wholesale and Walmart Inc. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), put options short calls of $200 in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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