Albertsons Companies, Inc. (ACI) operates food and drug stores in the United States. The company’s food and retail drug stores offer groceries, general merchandise, health and beauty care products, pharmacy, fuel, and other items and services. In addition, it manufactures and processes food products for sale in stores.

On October 14, ACI and Kroger (KR) entered a definitive agreement under which the companies will merge two complementary organizations with iconic brands and deep roots in their local communities to establish a national footprint. Combining two well-known and trusted supermarket banners should expand customer reach.

ACI’s shareholders are expected to receive total consideration valued at $34.10 per share. “This transaction with Kroger provides substantial value to shareholders and exciting opportunities for associates to be part of a combined organization with the ability better to support the lives and health of millions of Americans,” said Chan Galbato, Co-Chair of ACI’s Board of Directors and CEO of Cerberus Operations.

In addition to a special cash dividend of $6.85 per share announced in connection with the signing of the merger agreement, ACI’s Board of Directors declared a cash dividend of $0.12 per share for the third quarter of 2022. The cash dividend is payable on November 14, 2022. It pays $0.48 as dividends annually, yielding 2.28% on the current price. This compares to its 4-year average dividend yield of 1.22%.

The retailer delivered solid performance during the second quarter. ACI’s CEO Vivek Sankaran said, “Throughout the quarter, we continued to invest in our digital transformation, our differentiation in Fresh, and the modernization of our capabilities. As we look ahead to the year’s balance, we believe we are well-positioned to further accelerate in each of these areas as we continue to roll out our Customers for Life strategy.”

“With ongoing productivity to support our investments and to cushion inflationary and consumer headwinds, we will continue to prioritize our investments in deepening our relationships with our customers and communities,” he added. 

Various macroeconomic concerns have kept the stock market under pressure since the beginning of the year. The S&P 500 lost more than 21.3% year-to-date, while the Nasdaq Composite declined more than 30%. Last month, the Fed announced a 75- basis-point interest rate hike to tame sky-high inflation. With more aggressive rate hikes on the horizon, recession odds are escalating.

Despite the bearish market sentiment, investors could consider investing in quality stocks like ACI without hesitation due to its strong fundamentals and solid growth prospects. ACI has declined 21.1% over the past year to close the last trading session at $21.08. However, Wall Street analysts expect the stock to hit $31.69 in the next 12 months, indicating a potential upside of 50.3%.

Here is what could influence ACI’s performance in the upcoming months:

Robust Financials

ACI’s net sales and other revenue increased 8.6% year-over-year to $17.92 billion in the fiscal 2022 second quarter ended September 30, 2022. Its operating income rose 9.3% year-over-year to $531 million. Its adjusted EBITDA grew 8.6% from the prior-year period to $1.05 billion.

Furthermore, the company’s adjusted net income increased 13.2% from the year-ago value to $418.30 million, while its adjusted net income per Class A common share came in at $0.72, up 12.5% year-over-year. As of September 10, 2022, its cash and cash equivalents were $3.39 billion, compared to $2.90 billion as of February 26, 2022.

Favorable Analyst Estimates

Analysts expect ACI’s revenue for the fiscal 2023 second quarter (ending November 2022) to come in at $17.47 billion, indicating an increase of 4.4% year-over-year. The current year’s consensus revenue estimate of $76.60 billion indicates a 6.6% year-over-year increase. The company has surpassed the consensus revenue estimates in each of the trailing four quarters.

In addition, the consensus revenue estimate of $77.74 billion for the next fiscal year (ending February 2024) represents a 1.5% increase year-over-year. Also, the company’s EPS for the same year is expected to increase marginally year-over-year to $2.60.

High Profitability

ACI’s trailing-12-month ROCE, ROTC, and ROTA of 45.44%, 8.75%, and 5.93% compare to the industry averages of 12.17%, 6.18%, and 4.63%, respectively. Its trailing-12-month asset turnover ratio of 2.69% is 237.7% higher than the industry average of 0.80%.

Discounted Valuation

In terms of forward non-GAAP P/E, ACI’s 7.11x is 59.9% lower than the industry average of 17.71x. The stock’s 0.29x forward EV/Sales is 82.2% lower than the industry average of 1.65x. Moreover, its forward EV/EBITDA multiple of 5.11 compares with the industry average of 11.55.

In addition, ACI’s forward EV/EBIT of 8.69x is 43.1% lower than the 15.28x industry average. Its 0.15x forward Price/Sales is 87.5% lower than the 1.18x industry average. Also, the stock’s forward Price/Cash Flow of 3.89x is 70% lower than the 12.95x industry average.

POWR Ratings Show Promise

ACI has an overall A rating, which equates to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

ACI has a B grade for Quality, consistent with its higher-than-industry profitability metrics. In addition, it has a B grade for Value, in sync with its lower-than-industry valuation metrics.

ACI is ranked #12 out of 38 stocks in the A-rated Grocery/Big Box Retailers industry.

Beyond what I stated above, our POWR Ratings system has also rated ACI for Growth, Sentiment, Momentum, and Stability. Get access to all ACI ratings here.

Bottom Line

ACI’s revenue and net income have increased at CAGRs of 7.4% and 48.1% over the past three years, respectively. Moreover, the company’s near-term prospects look bright, driven by stable product demand and continued strategic investments.

Since the market is expected to remain under pressure in the coming months, it could be wise to invest in this quality stock with significant upside potential.

How Does Albertsons Companies, Inc. (ACI) Stack Up Against its Peers?

ACI has an overall POWR Rating of A. One could also check out these other stocks within the Grocery/Big Box Retailers industry with an A (Strong Buy) rating: Koninklijke Ahold Delhaize N.V. (ADRNY), Ingles Markets Inc. CI A (IMKTA) and Village Super Market, Inc. (VLGEA).

ACI shares were trading at $21.15 per share on Monday morning, up $0.07 (+0.33%). Year-to-date, ACI has declined -5.53%, versus a -19.62% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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