Options Trade – The Kroger Co. (NYSE:KR) Calls 
Monday, September 08, 2014

**OPTIONS TRADE: Buy the KR Jan 2015 55.000 call (KR150117C00055000) at or under $1.20, good for the day. Place a protective stop limit at $0.45 and a pre-determined sell at $2.00.

by Ian Harvey

September 08, 2014

Introduction

The Kroger Co. (NYSE: KR), the world's largest grocery store, reports second-quarter results before the market opens on September 11. Analysts have forecast quarterly earnings of $0.69 per share, up from $0.60 during the same period last year. KR stock has greatly outperformed the overall market in 2014, with shares appreciating 32.0% year to date.

Kroger has shown amazing strength of late, but even with the strength the stock has shown, its valuation remains attractive. KR is currently just pennies off its 52-week high, but its P/E ratio is an acceptable 17.8, indicating additional upside potential should the company post better than expected second-quarter numbers. Analysts have a bullish outlook on the company, with earnings expected to grow 11% next year, which will keep shares moving in the right direction if the company is able to hit those lofty expectations.

Technical Details

KR was recently trading at $51.60, just $0.12 below its 12-month high and $16.47 above its 12-month low. Technical indicators for KR are bullish and the stock is in a strong upward trend. The stock has support above $49.90 and is trading above recent resistance.

Earnings

The Kroger last announced its earnings results on Thursday, June 19th. The company reported $1.09 EPS for the quarter, beating the Thomson Reuters consensus estimate of $1.05 by $0.04. The company had revenue of $32.96 billion for the quarter, compared to the consensus estimate of $32.59 billion.

During the same quarter in the prior year, the company posted $0.92 earnings per share. The company’s quarterly revenue was up 9.9% on a year-over-year basis. On average, analysts predict that The Kroger will post $3.28 earnings per share for the current fiscal year.

Last quarter, Kroger posted same-store sales that jumped 4.6%, a number that puts it among the top performers in the industry. In the process, Kroger accomplished a surprising feat, outgrowing Whole Foods Market (NASDAQ:WFM), which only grew same-store sales by 3.9%.

Moreover, revenues are projected to continue growing as, similar to Whole Foods, Kroger is making a strong push into the trend of healthier eating. Results are already starting to mount as illustrated by the double-digit sales increase that it’s natural and organic foods department posted last quarter.

There should be plenty of expansion ahead in the healthy eating category, which will lift profits and is likely one reason why Kroger boosted its full-year sales growth guidance to as high as 4% on a same-store basis.

Although Kroger operates at a very low profit margin, it generates a very good return over equity. In the period of the last ten years, it has generated a return of 19.9% on equity (ROE) and more than 30% in the last two fiscal years. The performance of Kroger is much better compared to its peers Costco and Safeway, which generated 13.2% and 9.5%, respectively, over the last 10 fiscal years. Kroger's high ROE clearly states how well the company's management is reinvesting its earnings at a high rate for shareholders.

Acquisitions Profitable

Kroger is increasing its scale of operation by buying companies to compliment their industry. These are:-

1. Harris Teeter acquired earlier this year. The acquisition helps Kroger add 212 stores in the growing Southeastern US markets. The company will retain the Harris Teeter brand name, which has a prevailing loyal customer base. Further, Harris Teeter's stores are located in areas with people generating high income, such as in Northern Virginia and the North Carolina research triangle, which gives a direct reach to such customers.

2. Vitacost.com (NASDAQ:VITC) is another important acquisition that Kroger has announced, an online retailer of healthy living products. Vitacost is an e-commerce company focusing on nutrition and healthy living products. The company will benefit from the reach of Vitacost across all 50 states, including the 16 states where Kroger still does not have its access.

Although the synergies are not clearly evident at the moment, Vitacost's focus on a fast-growing healthy product market should benefit it in the long run, as people are turning more health-conscious. Kroger's management also expects the deal could enhance the sale of its own Simple Truth organic product line.

Analysts Opinions

Analysts at Goldman Sachs reiterated a “neutral” rating on shares of The Kroger in a research note on Monday, August 18th.

The company has been the subject of a number of research reports:-

• Analysts at Prime Executions initiated coverage on shares of The Kroger in a research note on Thursday, July 24th. They set a “buy” rating and a $56.00 price target on the stock.

• Also, analysts at BMO Capital Markets upgraded shares of The Kroger from a “market perform” rating to an “outperform” rating in a research note on Tuesday, July 15th. They now have a $58.00 price target on the stock, up previously from $52.00.

Six research analysts have rated the stock with a hold rating and twelve have issued a buy rating to the company. The stock currently has an average rating of “Buy” and a consensus price target of $50.71.

Conclusion

Kroger has had a great year and looks to be firing all guns to maintain its strength. Kroger's management has maintained its market share, and has continuously succeeded in increasing it. The two most recent acquisitions are adding to the revenue, and have also opened new markets and increased its online reach.

Historically, the company had done a good job outpacing analyst estimates, reporting earnings that were in-line or higher than analyst estimates each quarter over the last two years. Expect another upbeat earnings report, which should push the stock even higher than its current 52-week high.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the KR Jan 2015 55.000 call (KR150117C00055000) at or under $1.20, good for the day. Place a protective stop limit at $0.45 and a pre-determined sell at $2.00.



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