Kroger’s (NYSE: KR) stock surged following the Q4 results and guidance, not because of any mind-blowing growth but because this high-quality cash-producing machine proved its worth. It is on track to deliver shareholder value with or without the merger with Albertsons Companies (NYSE: ACI) and is cheap to buy. The stock trades at only 12X earnings even with the post-release pop in price action, yielding more than 2.0% with a beta near 0.6X the S&P 500, making it a solid choice for risk-averse investors. 

Regarding worth, the company is growing and delivering value to shareholders today. The company paused share repurchases to prepare for the Albertsons merger but still pays dividends. Pausing repurchases allowed the business to build up its cash balance, nearly 3X YOY and reducing leverage. 

The debt is relatively flat YOY, but the adjusted net-debt-to-cash leverage ratio is down to 1.33X, about half the company’s target, setting it up nicely. If the deal progresses, the company has already progressed against the anticipated debt load at closing. If not, the company has ample capital and leverage capacity for above-average distribution growth and resume share repurchases while maintaining its investment-grade credit rating. 

The merger with Albertsons is still in the works but is as far from closing as ever. The latest news is that the FTC sues to block the deal and may succeed in stopping it. They view it as anti-competitive for the retail/grocery universe. The takeaway for investors is that Kroger may not buy Albertsons, which may be for the best. The company would be bigger after the merger; today, it is better, in the best condition it's been in for years and getting stronger by the day. 

Kroger’s Has Solid Quarter: Margins Shine

Kroger had a solid Q4, growing revenue by 6.5% to $37.1 billion. The revenue outpaced consensus by a slim ten basis points on strength in store count offset by a 0.8% decline in comps. Margin is the catalyzing factor, with gross margin and costs increasing YOY but one offsetting the other, and the net results well above consensus. The $1.34 in adjusted earnings is up 35% YOY, including an extra 13th week and still strong at $1.14 or up 15% when adjusted for the time difference.

Guidance is tepid, but may be cautious. The company forecasts 0.25% to 1.75% in top-line growth, with earnings ranging from $4.30 to $4.50. This is below the analyst's $4.56 consensus target but sufficient to sustain the capital outlook. Among the reasons that guidance may be cautious is the lean into digital. Digital sales are a pillar of the growth strategy and grew at a 10% pace in Q4, led by an 18% increase in households that will provide leverage in 2024. 

Analysts Warm to Kroger in 2024

The analysts’ activity in Kroger has been light in Q1 2024, including one revision before the Q4 release and one after, but it is favorable to shareholders. The two include an upgrade to Equal Weight from Wells Fargo and an increased price target from Telsey Advisory Group after Kroger issued the report. Telsey sees this stock trading at $60 or about 1000 basis points higher than now.

The price action in Kroger is also favorable to higher share prices for this grocery stock. The stock surged 15% to confirm support at the bottom of its trading range and regain support above the long-term uptrend line. The uptrend broke due to uncertainties but is not back in play, with the potential for new highs soon. The next target for critical resistance is near $60 and may be reached before summer. Risks include news about the ACI merger and consumer spending habits. However, Kroger is well-positioned because consumers shift from discretionary to dailies and food, its core sales category.