Everyone hates Kroger (NYSE:KR). This is a company with over $120 billion in sales and a market cap of under $20 billion. That's a price to earnings ratio of 6.5, half that of Ford Motor (NYSE:F). The dividend today yields 2.4%, against 2.16% for the U.S. 10-year bond.
What market watchers want to talk about is the dance among Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN) and Costco Wholesale (NASDAQ:COST) that currently defines U.S. retailing. Kroger's grocery stores and (worse) department stores are thought to be stodgy, staid and old-fashioned. But Kroger is the fourth largest retailer in the U.S., and it's not going away.
Kroger hasn't been passive. Kroger does curbside delivery just like Walmart. Kroger has house brands just like Amazon. Kroger will sell you vast quantities just like Costco. Kroger also has upscale markets filled with prepared foods like Amazon's Whole Foods.
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Kroger Stock Partners With Ocado
Kroger also has something those other companies don't have - an alliance with Ocado (OTCMKTS:OCDGF).
Ocado isn't huge. Its annual sales are about $2 billion and its market cap around $8 billion. Ocado is all about making internet retailing profitable, and its automated warehouses make those of Amazon look primitive.
Kroger signed its alliance with Ocado a year ago and has already built one of its warehouses near Kroger's home office in Cincinnati, with plans to build two more in Florida and the mid-Atlantic region, both hot for grocery delivery. Each warehouse or "shed" costs about $55 million, about half the cost of a Costco store, and 20 are in the planning stages.
Kroger is also working with Microsoft (NASDAQ:MSFT) on a new system that brings promotions right to the store shelf and does inventory through the cloud, meaning it can also get advertising revenue from the brands it stocks. They're launching a fleet of unmanned delivery vehicles. Progressive Grocer named Kroger its "retailer of the year" for 2018.
Wait, There's More
Kroger has long produced much of its own product and run its own house brands. Through Ocado, that may also mean growing its own fruits and vegetables, using "vertical farms" the British company has just put $20 million into. Ocado has invested in a company that already does this profitably with herbs. It has a joint venture with other vertical farmers, including U.S.-based 80 Acres, to do the same thing with other produce.
A lot of Kroger's leading-edge work involves pilot projects, or one-offs. The whole Kroger ecosystem, which operates under 17 different store labels including Dillon's, Fred Meyer, King Soopers and Ralphs, as well as Kroger (don't get me started on that) isn't being transformed all at once.
But it is being transformed. Kroger isn't falling behind in the retail technology arms race. It's just going about things in a different, quieter way.
The Bottom Line on KR Stock
Sadly, no one seems to care.
Kroger had net income of about $3 billion last year while Walmart had net income of $7 billion. Amazon basically broke even on retailing last year, its $10 billion in profit coming from its cloud and Prime Memberships.
It is useless to write that a company "should" be worth more when it consistently isn't. Kroger had a vogue in 2015 when it traded near $40 per share, but for the last two years it's been in a trading range of $20-$30. It was trading at $24.40 early on June 11.
I keep hoping Kroger would be more open about its ambitions, unify operations under a single Kroger brand and go toe-to-toe with its larger rivals.
Until then, they're a defensive play with an affordable dividend. Just watch this space.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O'Flynn and the Bear , available now at the Amazon Kindle store. Write him at firstname.lastname@example.org follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, MSFT and KR.
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