The Kroger Co. (NYSE:KR) shares are up more than 1.46% this year and recently decreased -1.59% or -$0.45 to settle at $27.85. SUPERVALU Inc. (NYSE:SVU), on the other hand, is down -0.37% year to date as of 01/02/2018. It currently trades at $21.52 and has returned -0.83% during the past week.
The Kroger Co. (NYSE:KR) and SUPERVALU Inc. (NYSE:SVU) are the two most active stocks in the Grocery Stores industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect KR to grow earnings at a -1.48% annual rate over the next 5 years. Comparatively, SVU is expected to grow at a -14.85% annual rate. All else equal, KR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 1.86% for SUPERVALU Inc. (SVU). KR’s ROI is 11.90% while SVU has a ROI of 11.00%. The interpretation is that KR’s business generates a higher return on investment than SVU’s.
Cash is king when it comes to investing. KR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.89. Comparatively, SVU’s free cash flow per share was +0.92. On a percent-of-sales basis, KR’s free cash flow was -0.68% while SVU converted 0.28% of its revenues into cash flow. This means that, for a given level of sales, SVU is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. KR has a current ratio of 0.80 compared to 1.20 for SVU. This means that SVU can more easily cover its most immediate liabilities over the next twelve months. KR’s debt-to-equity ratio is 2.38 versus a D/E of 4.89 for SVU. SVU is therefore the more solvent of the two companies, and has lower financial risk.
KR trades at a forward P/E of 13.89, a P/B of 3.96, and a P/S of 0.21, compared to a forward P/E of 9.15, a P/B of 2.21, and a P/S of 0.06 for SVU. KR is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. KR is currently priced at a 3.49% to its one-year price target of 26.91. Comparatively, SVU is -28.07% relative to its price target of 29.92. This suggests that SVU is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for KR and 2.80 for SVU, which implies that analysts are more bullish on the outlook for SVU.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. KR has a beta of 0.91 and SVU’s beta is 2.31. KR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.KR has a short ratio of 3.06 compared to a short interest of 4.32 for SVU. This implies that the market is currently less bearish on the outlook for KR.
SUPERVALU Inc. (NYSE:SVU) beats The Kroger Co. (NYSE:KR) on a total of 7 of the 14 factors compared between the two stocks. SVU is growing fastly, has a higher cash conversion rate and higher liquidity. In terms of valuation, SVU is the cheaper of the two stocks on an earnings, book value and sales basis, SVU is more undervalued relative to its price target. Finally, UNH has better sentiment signals based on short interest.