Kroger (KR) Executing but Shares 'Fully Valued' - UBS

June 26, 2013 4:00 PM EDT
Get Alerts KR Hot Sheet
Price: $34.16 -0.29%

Rating Summary:
    13 Buy, 13 Hold, 1 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 29 | Down: 30 | New: 23
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UBS raised its price target on Kroger (NYSE: KR) from $32 to $34 following recent Q1 earnings, although the Neutral rating was maintained. While earnings were "solid", shares are fairly valued UBS analyst Jason DeRise said.

On the quarter, DeRise notes, "Kroger reported its Q1 results which showed, as we expected, 6% y/y clean EBIT growth (FIFO ex fuel). Kroger let the benefit from generic conversions (UBSe ~20-30bps) flow through to the bottom line without reinvesting in lower prices (reported FIFO gross margin ex fuel only fell - 15bps). Though EPS grew 20% y/y, we estimate EPS adjusted (1) to FIFO (lower LIFO benefit was $0.04/sh), (2) ex peak pharmacy generic conversion ($0.06/sh benefit) and (3) ex fuel (a $0.01/sh drag), EPS growth would have been 9% y/y vs KR’s 8%-11% EPS growth model."

Commenting on valuation, the analyst notes that with shares up 8% year to date and by 26% over the last 12 month, the market "appears to fully appreciate the new Kroger growth model." Due to the full valuation, earnings growth will likely become the main driver of the share price, the analyst said. The analyst believes their are other plays in the sector besides Kroger at this point, pointing specifically to Whole Foods (NYSE: WFM) and Fresh Market (NYSE: TFM).

For an analyst ratings summary and ratings history on Kroger click here. For more ratings news on Kroger click here.

Shares of Kroger closed at $34.51 yesterday.

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