After easing for two consecutive months in October and November, inflation cooled off further in December. Moreover, given the inelastic demand for their products, grocery stocks could perform better during economic turmoil. Therefore, buying fundamentally strong grocery stocks, Walmart (WMT), and Albertsons Companies (ACI) could be wise. Let’s discuss this.
Since last year, consumers have been battling higher food prices due to high inflation. However, the Fed’s aggressive rate hikes have brought down prices as inflation eased for the consecutive months of October and November.
Moreover, December’s inflation report showed that the consumer price index declined 0.1% and increased 6.5% over the last 12 months. The food index increased by 0.3%, lower than 0.6% and 0.5% for October and November, respectively. While the Fed is still far from its long-term inflation target, cooling prices should raise investors’ sentiment.
On top of it, given the inelastic demand for groceries, grocery stocks are expected to weather an economic downturn better than other sectors as they could pass on rising costs to consumers. Furthermore, the grocery industry is trying to bolster its supply chains and offset labor shortages through automation.
Amid this backdrop, it could be wise for investors to buy fundamentally strong grocery stocks Walmart Inc. (WMT) and Albertsons Companies, Inc. (ACI).
Walmart Inc. (WMT)
WMT engages in the operation of retail, wholesale, and other units worldwide. The company operates through three segments: Walmart U.S.; Walmart International; and Sam’s Club.
On October 31, 2022, Popable, a pop-up shop marketplace platform, and WMT announced a strategic partnership that allows small businesses to rent retail space in WMT stores across the country for short-term leasing.
The partnership is believed to help small business owners thrive, keeping excess inventory moving and creating greater built-in foot traffic. WMT is expected to benefit from the utilization of its store space.
For the fiscal third quarter that ended October 31, 2022, WMT’s total revenues increased 8.7% year-over-year to $152.81 billion. Its adjusted operating income increased 3.9% year-over-year to $6.02 billion. In addition, its adjusted EPS came in at $1.50, representing a 3.4% increase from the year-ago quarter.
WMT’s EPS for the quarter ending April 30, 2023, is expected to increase 7.4% year-over-year to $1.40. Its revenue for the quarter ending January 31, 2023, is expected to rise 4.3% year-over-year to $158.09 billion.
The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters. The stock has gained 16.5% over the past six months to close the last trading session at $146.13.
WMT’s POWR Ratings reflect its solid prospects. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the A-rated Grocery/Big Box Retailers industry, it is ranked #9 out of 39 stocks. It has an A grade for Sentiment and a B for Stability and Quality.
Click here to see the additional POWR Ratings of WMT for Growth, Value, and Momentum.
Albertsons Companies, Inc. (ACI)
ACI engages in the operation of food and drug stores. The company offers grocery products, general merchandise, health and beauty care products, pharmacy, fuel, and other items and services. It also manufactures and processes food products for sale in stores.
On October 14, 2022, Kroger Co. (KR) and ACI announced that they had entered into a definitive merger agreement. Vivek Sankaran, CEO of ACI, believes that together with KR, they would be able to provide customers with greater value and access to fresh food and essential pharmacy services and positively impact their associates and communities.
In terms of forward non-GAAP P/E, ACI’s 6.76x is 65% lower than the 19.29x industry average. Likewise, its 5.01x forward EV/EBITDA is 56.7% lower than the 11.55x industry average. In addition, its 0.15x forward Price/Sales is 87.1% lower than the 1.14x industry average.
ACI’s net sales and other revenue for the third quarter (ended December 3, 2022) increased 8.5% year-over-year to $18.15 billion. The company’s adjusted net income increased 10.5% year-over-year to $505.10 million.
Moreover, its adjusted EBITDA increased 10.2% year-over-year to $1.16 billion, while its adjusted net EPS came in at $0.87, representing a 10.1% increase from the prior-year quarter.
Analysts expect ACI’s EPS for the fiscal year 2023 to increase 3.2% year-over-year to $3.17. Its revenue for the quarter ending February 28, 2023, is expected to increase 4.7% year-over-year to $18.19 billion. The stock has gained 10% over the past three months to close the last trading session at $21.41.
ACI’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. It is ranked #8 in the same industry. It has a B grade for Value, Sentiment, and Quality.
In total, we rate ACI on eight different levels. Beyond what we stated above, we have also given ACI grades for Growth, Momentum, and Stability. Get all ACI ratings here.
WMT shares were trading at $145.34 per share on Thursday afternoon, down $0.79 (-0.54%). Year-to-date, WMT has gained 2.50%, versus a 4.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika’s passion for writing and interest in financial markets led her to pursue a career in investment research.
With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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