Buy Kroger, an Outperforming Stock and Value Bargain

NEW YORK (TheStreet) --Kroger (KR), the fifth-largest retailer in the U.S. and No. 1 among supermarket chains, has fed its shareholders as well as it has fed its shoppers. If you own the shares, keep them. If you don't, it's time to buy.

Kroger shares, currently at $72, are up 12% in 2015 and 53% for the past 52 weeks. The Cincinnati company is outperforming the Dow Jones Industrial Average (DJI) and S&P 500 (SPX), which are flat on the year to date, but Kroger's gains has bested the 3.5% gain in the SPDR S&P Retail ETF (XRT), which includes Costco (COST) and Home Depot (HD).

So, is it time to take profits? That's an important question for investors ahead of Kroger's fiscal first-quarter 2015 earnings Thursday before the opening bell.

For the quarter that ended April, Kroger is projected to earn $1.22 per share, on revenue of $33.37 billion, translating to year-over-year increases of 12% and 1.3%, respectively. For the full year, ending January, earnings are projected to climb 10% to $3.87 per share, while revenue of $111 billion calls for a 2.3% increase year over year.

With full-year earnings projected to climb at more than four times the rate of revenue, why sell a company whose focus is on profit growth? The stock is down 6.5% over the past three months. Even with Kroger's outperformance, the stock is still relatively cheap, trading at just 20 times earnings, compared to a P/E of 21 for the S&P 500.

Plus, when projecting out to fiscal 2017 consensus earnings expectations of $4.28 per share, that P/E drops to 16, which is one point lower than the S&P 500. Even then, there's at least $2 per worth of value in the stock, assuming KR had a forward multiple that was on par with the market. This means KR stock today should trade at around $74 per share, not $72.

And this would explain why the stock -- despite already gaining almost 50% in 12 months -- still have a consensus buy rating and an average analyst 12-month price target of $80, suggesting better than 11% gains from current levels. Assuming KR can reach its high analyst target of $90, that implies 25%.

In other words, there is tons of value for investors looking to place a long-term bet on KR stock. 

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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