Albertson’s Companies (NYSE: ACI) proposed takeover by Kroger (NYSE: KR) may or may not go through, but it doesn’t matter. Either way, this stock is a value for income investors you don’t find daily. The stock trades well below its proposed takeover price, the analysts' consensus target, and its peers' earnings multiple, suggesting there is nowhere to go but up. If the merger goes through, investors will benefit from the higher price received from Kroger, and if it doesn’t, share prices will likely move higher anyway, and there is a potential for a dividend increase or other capital return.

Albertson’s generates cash flow and has ample room in its numbers for a substantial dividend increase should the merger fail. The payout ratio is a low 22% relative to Q4 results and 18% of the F2024 consensus estimates. Balance sheet metrics are also healthy and give little reason to fear distribution safety. The balance sheet highlights at the end of F2024 are a reduction in cash offset by receivables, inventory, prepaid expenses, a slight decrease in debt, and a 70% increase in shareholder equity. 

The latest news includes an updated merger agreement and an increased number of divested stores. To appease regulators, the number of stores to be sold to C&S Wholesale Grocers increased by 166, or 40%, to 579. That will reduce Albertson’s store count by 25% but allow C&S a competitive edge while leaving employees unaffected. We’ll see if it's enough to get the merger deal to go down. 

Albertson’s Steady After Mixed Results 

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Albertson’s had a mixed quarter, but the results aligned with the outlook for value and distributions. The company reported $18.3 billion in revenue, which is flat compared to last year and shy of the consensus reported by Marketbeat but offset by market conditions, lower fuel sales, and internal metrics. Comp-store sales are up 1% and offset by a reduced store count. Systemwide, digital sales are up 24% and helping to sustain margin strength despite the impact of lower margin business. Pharmacy, one of the growth pillars and a lower-margin business contributed significantly to the results.

Margin news is mixed but better than expected. The company’s GAAP margins widened slightly but are offset by a slim contraction in the adjusted. The net result is that GAAP EPS of $0.43 is down $0.11 compared to last year, and the adjusted $0.54 is down by $0.25 but less than expected. Contraction is partly due to a one-off in the prior year, but increased interest expense and higher taxes also played a role.

Albertson’s is Three Times a Value 

Albertson’s value begins with the merger price. The merger price assumes a sale near $27.20, a price that may come down due to the new terms, but it won’t come down by 35%. That’s the discount offered by the current ACI share price. The analysts' consensus compounded the value, which is falling but still assumes more than 20% of the upside. We can assume that the analysis price target aligns more with the final deal.

As for its price-to-earnings multiple, the stock trades at 7X earnings, several handles below Kroger, which trades closer to 13X earnings—other prominent food retailers such as Go Grocery Outlet (NASDAQ: GO) and Casey’s General Stores (NASDAQ: CASY) trade close to 24X. It is doubtful that Albertson’s will quadruple in value, but there is value and potential for a double-digit upside. 

The Technical Outlook: Albertson’s is at Rock Bottom 

The price action in Albertson’s is having trouble with traction following the Q4 2023 results, but a deep decline is not expected. The market is on a critical support level that has provided solid support since the merger was announced. Assuming the market continues to buy into the stock at this level, it should begin to rebound soon and may move upward within its range. The top of the range is near $23.50, suitable for a gain of 15%.