Why we still like U.S. food retailers

Greg Dean's picture

We have been talking for some time about how the U.S. economy is quietly improving despite the negative news we hear each day. Bad news makes for attention-grabbing headlines, but we at Cambridge focus our time and energy on speaking to companies. That is why we weren’t caught up in the anxiety over the fiscal cliff, the debt ceiling and other events.

Steve has written about U.S. housing and I want to highlight a derivative theme we own: U.S. food retailers. We’ve owned companies in this sector for some time and added to our holdings after recent quarterly results confirmed our thesis that the consumer situation is improving. These businesses had been suffering as American consumers cut spending in response to high debts and unemployment. Now, with the S&P 500 up significantly from its lows and Americans having made significant progress in deleveraging, consumer confidence has rebounded. Americans are going to the grocery store more often and buying more items.

For example, Kroger’s most recent quarterly earnings were 25% higher than forecast, which is shocking because grocers are simple businesses. It shows you how these companies lack a following among analysts. Kroger is a $16 billion company growing earnings at about 10% per year and offering a 2% yield – while trading at 10x forward earnings! The company is conservatively financed and has been repurchasing shares aggressively in recent years ($1.3 billion worth in 2012), given how cheap the market has priced them. We believe that Kroger could trade at 12-14x earnings given its earnings growth of 8-10%. This space also may become attractive to private equity, as these are inherently defensive businesses with stable cash flows and the potential for real-estate plays because many grocers own their sites and surrounding property.

We are a conservative team and aren't willing to bet that the U.S. is out of the woods yet, as the government has a lot of work to do in repairing its own balance sheet. However, people will always need to eat and if the U.S. were to suffer a setback, we would buy more Kroger.


Submitted by Mark Gerber on

Hi Greg. Thanks for the background on Kroger. We are just home from a vacation in Florida and I saw many Kroger trucks on the 75 and 65 as we travelled south, then north. We shopped at a Walmart Super Store, which had an amazing grocery and produce department. Do you hold Walmart as well?

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