Should you buy Kroger shares in June?

By: Stanko Iliev
Stanko Iliev
Stanko dedicates himself to providing investors with relevant information they can use to make investment decisions. He loves the… read more.
on Jun 11, 2021
  • Goldman Sachs assigned a sell rating on Kroger due to the risk of an inflationary environment
  • Kroger shares have found strong support above the $36 level
  • Kroger trades at less than five times TTM EBITDA

The Kroger Co. (NYSE: KR) shares have found strong support above the $36 level, but Goldman Sachs lowered its rating to “sell” from “neutral.” Kroger announced the opening of its Customer Fulfillment Center in Florida, and the company’s management remains very optimistic about its outlook.

Fundamental analysis: The company’s management expects that the business will continue to perform well

Kroger is the United States’ largest supermarket by revenue and the second-largest general retailer behind Walmart. This company’s fundamentals are excellent, but Goldman Sachs assigned a sell rating on Kroger due to the risk of an inflationary environment.

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“We highlight Koger’s more limited exposure to fresh (25% sales penetration vs. 45% for ACI), which is typically a category better at mitigating inflation risks compared to packaged foods. Looking at the last rising inflation period in 2017, KR indicated not all higher costs were passed through to customers and any top-line benefits were largely offset by price investments with gross margins declining -41 bps y/y,” said Kate McShane, an analyst from Goldman Sachs.

Goldman Sachs assigned a new price target of $31 even though Kroger generated tremendous free cash flow and reduced its debt by $2 billion in 2020. Due to uncertainty around vaccination, the company lowered its 2021 guidance, but the positive news is that Kroger announced the opening of its Customer Fulfillment Center in Florida.

This marks Kroger’s entry into the Florida market with an e-commerce delivery service which will certainly improve the company’s profitability.

“The Kroger Delivery network combines the efficiency of technology with the experience of our associates to deliver fresh, affordable food and a consistent and rewarding customer experience,” said chief supply chain officer Gabriel Arreaga.

Last week, Kroger announced that it would hire ten thousand new employees to support retail, e-commerce, pharmacy, manufacturing, and logistics operations. This proves that the company’s management expects that the business will continue to perform well, and they remain very optimistic about the company’s outlook.

Kroger trades at less than five times TTM EBITDA, and with the market capitalization of $29.4 billion, shares of this company are reasonably valued. Kroger shares could deliver strong shareholder value and attractive prospects in the longer term.

Technical analysis: Kroger shares have found strong support above the $36

Data source: tradingview.com

On this chart, I marked important resistance and support levels. The important support levels are $36, and $34, $40, and $42 represent the resistance levels. If the price jumps above $40, the next target price could be $42 or even $44.

Rising above $44 supports the continuation of the bullish trend; still, if the price falls below $36, it would be a “sell” signal, and we have the open way to a $34 support level.

Summary

Kroger shares could deliver strong shareholder value ​, but Goldman Sachs assigned a sell rating on Kroger due to the risk of an inflationary environment. For now, there is no risk of the bear market; still, if the price falls below $36, it would be a “sell” signal, and we have the open way to a $34 support level.

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