Kroger Rise on Buffett Purchase Seen as Selling Opportunity at R5 Capital

Kroger shares rose after Warren Buffett’s Berkshire Hathaway took a 2.3% stake in the No. 1 U.S. grocery chain, and R5 Capital analyst Scott Mushkin advises investors to sell into that strength.
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Kroger  (KR) - Get Report shares rose after Warren Buffett’s Berkshire Hathaway  (BRK.A) - Get Report took a 2.3% stake in the No. 1 U.S. grocery chain, and R5 Capital analyst Scott Mushkin says investors should sell into that strength.

“Even Berkshire, our research suggests, will be hard-pressed to change the very difficult competitive situation for Kroger,” he wrote in a report, according to Bloomberg.

Mushkin says the Cincinnati chain's important pharmacy and center-store businesses are in trouble and that Walmart  (WMT) - Get Report, Aldi and Lidl will threaten its private-label margins.

In addition, Berkshire hasn’t exactly lit up the market with its consumer-sector investments, such as Kraft Heinz  (KHC) - Get Report, he wrote.

Kroger shares fell 50% to $21 last July from $42 in December 2015. 

The company has suffered from intensified competition in the grocery industry, as newcomers such as Walmart and Royal Ahold/Delhaize  (ADRNY)  entered the fray. The growth of online grocery shopping also has hurt Kroger.

But the stock has rebounded over the past seven months, with many investors and analysts saying the selloff was overdone. At last check Kroger shares were trading up 7.7% at $30.39.

Kroger "should be able to capitalize on the changing landscape,” Morningstar analyst Zain Akbari wrote in a report last month.

“We maintain that Kroger's local-market scale allows it to derive cost leverage that fuels competitive pricing as well as the investments needed to build on its already considerable presence in each of the emerging channels.”

And Evercore ISI analyst Michael Montani disagreed with Mushkin about the implications of Berkshire’s stake. 

Buffett’s company could help Kroger implement cost cuts and strategies to boost revenue growth, Montani wrote in a report, according to Bloomberg.