While inflation has been showing some signs of cooling recently, macroeconomic headwinds are expected to keep food prices elevated. Moreover, grocery store stocks tend to be good hedges amid market downturns due to inelastic demand for their goods. Hence, fundamentally strong grocery store stocks Walmart (WMT), Casey’s General (CASY), and Sprouts Farmers Market (SFM) might be ideal buys now as recession concerns rise. Keep reading.
While the November consumer price index rose less than expected, showing signs of inflation cooling, food prices rose 0.5% and were up 10.6% from a year ago. Moreover, the Russia-Ukraine war, sharp rising costs of energy and transportation, blocks in trade flows, poor crop conditions, and avian flu outbreaks are expected to push food prices even higher.
Moreover, online retail shopping has grown significantly over the past few years. Last year, online sales grew 10.6% year-over-year, and e-commerce sales bagged 21.6% of total retail sales, up from 20.9% in 2021. Moreover, the development of several online grocery store apps is expected to add momentum to the growth of the online grocery market share.
Furthermore, given the inelastic demand for groceries, the industry is expected to perform steadily even if the economy suffers a recession, as grocery stores can easily pass on rising costs to consumers.
Therefore, fundamentally strong grocery store stocks Walmart Inc. (WMT), Casey’s General Stores, Inc. (CASY), and Sprouts Farmers Market, Inc. (SFM) might be ideal buys now as a recession looks imminent this year.
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. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, and discount stores; membership-only warehouse clubs; e-commerce websites.
On January 5, WMT announced that it had successfully operated 36 drone delivery hubs across seven states, including Arizona, Arkansas, Florida, North Carolina, Texas, Utah, and Virginia. Over the past year, Walmart has safely completed more than 6,000 deliveries to customers in as little as 30 minutes.
WMT is uniquely positioned to offer drone delivery at scale, with its 4,700 stores located within 90% of the U.S. population, which might benefit the company.
WMT has paid dividends for 49 consecutive years. Its current dividend of $2.24 yields 1.55% annually.
WMT’s total revenue increased 8.7% year-over-year to $152.81 billion in the third quarter that ended October 31, 2022. Its net sales came in at $151.47 billion, up 8.8% year-over-year. Its adjusted EPS rose 3.4% year-over-year to $1.50.
The consensus EPS estimate of $1.40 for the fiscal year 2024 first quarter ending April 2023, represents a 7.4% improvement year-over-year. The consensus revenue estimate of $145.32 billion for the same quarter represents a 3.6% increase from the same quarter last year.
The company has an impressive earnings surprise history, as it surpassed the consensus revenue estimates in each of the trailing four quarters.
The stock has gained 16.5% over the past six months to close the last trading session at $144.86.
WMT’s POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
WMT is also rated an A in Sentiment and B in Stability. Among the 39 stocks in the A-rated Grocery/Big Box Retailers industry, it is ranked #10.
To see additional POWR Ratings for Growth, Value, Momentum, and Quality for WMT, click here.
Casey’s General Stores, Inc. (CASY)
CASY operates convenience stores under the Casey’s and Casey’s General Store names. Its stores offer a selection of food, beverages, tobacco and nicotine products, health and beauty aids, automotive products, and other non-food items.
On December 6, CASY declared a quarterly dividend of $0.38 per share, payable on February 15, 2023. Its annual dividend of $1.52 yields 0.69% on prevailing prices. The company has raised its dividend at a CAGR of 6.2% over the past three years.
CASY’s total revenue rose 21.9% year-over-year to $3.98 billion in the fiscal second quarter that ended October 31, 2022. Its net income increased 42% year-over-year to $137.56 million, and its earnings per share rose 41.7% from the year-ago value to $3.67.
The company is expected to witness revenue growth of 15.6% year-over-year to $3.52 billion for the fiscal third quarter ending January 2023. Its EPS is estimated to increase 9.7% year-over-year to $1.88 in the same quarter. The company has surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past six months, CASY has gained 13.4%, closing the last trading session at $219.18.
CASY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has a B grade for Sentiment, Quality, and Value. It is ranked #6 in the same industry.
Click here to see the additional POWR Ratings for CASY (Growth, Momentum, and Stability).
Sprouts Farmers Market, Inc. (SFM)
SFM offers fresh, natural, and organic food products in the United States. The company offers perishable product categories, including fresh produce, meat, seafood, deli, bakery, floral and dairy, and dairy alternatives; and non-perishable product categories, such as grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care.
On November 2, SFM announced its partnership with DoorDash Inc. (DASH) in select cities, beginning with Phoenix, Arizona, for on-demand grocery delivery. Customers can order thousands of fresh, natural, organic products from SFM by visiting the DoorDash mobile app or website. This is expected to have a positive impact on SFM’s topline.
During the third quarter ended October 2, 2022, SFM’s net sales increased 5.4% year-over-year to $1.59 billion. Its net income increased 2.9% year-over-year to $65.74 million, while its EPS for the quarter increased 8.9% year-over-year to $0.61. The company’s adjusted EBITDA rose 3.8% year-over-year to $121.54 million.
Analysts expect SFM’s revenue for the fourth quarter ending December 2022 to be $1.56 billion, representing 4.6% year-over-year growth. The company’s EPS is likely to increase by 14.6% to $0.37 for the same quarter. The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
SFM has gained 19.2% over the past six months to close its last trading at $32.09. It gained 2.3% intraday.
It is no surprise that SFM has a B grade which translates to Buy in our proprietary rating system. It is graded A for Quality and is ranked #17 in the Grocery/Big Box Retailers industry.
Beyond what we’ve stated above, we have also given SFM grades for Momentum, Value, Stability, Growth, and Sentiment. Get all SFM ratings here.
WMT shares were trading at $145.06 per share on Wednesday morning, up $0.20 (+0.14%). Year-to-date, WMT has gained 2.31%, versus a 2.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor’s degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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