Consumer staples companies enjoy inelastic demand for their products regardless of economic conditions. Due to its defensive nature, consumer staples stock Albertsons Companies, Inc. (ACI) has been performing relatively well amid the ongoing economic uncertainty.

The company operates food and drug retail stores across the United States. Its retail stores offer essentials, including 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 and improve proximity to deliver affordable food to nearly 85 million householders.

Under the merger agreement’s terms, ACI’s shareholders will receive total consideration valued at $34.10 per share. As part of this transaction, ACI would pay a special cash dividend of up to $4 billion to its shareholders. The special cash dividend is expected to be approximately $6.85 per share, payable on November 7, 2022.

“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 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 2.34% on the current share price. This compares to its 4-year average dividend yield of 1.94%.

The retailer delivered solid results for the second quarter. Its net sales and other revenue came in at $17.9 billion for the quarter ended September 10, 2022, compared to $16.5 billion in the year-ago quarter. The increase was driven by the company’s 7.4% growth in identical sales and higher fuel sales because of retail price inflation.

Vivek Sankaran, ACI’s CEO, 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 balance of the year, 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.”

Shares of ACI have gained 8.2% over the past month to close the last trading session at $20.51. Moreover, Wall Street analysts expect the stock to hit $31.28 in the next 12 months, indicating a potential upside of 53.4%.

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

Strong 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. The company’s adjusted net income increased 13.2% from the year-ago value to $418.30 million,

Furthermore, the company’s 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 stood at $3.39 billion, compared to $2.90 billion as of February 26, 2022.

Solid Growth Story

ACI’s revenue has grown at a 7.4% CAGR over the past three years. The company’s net income and EPS have grown at 48.1% and 15% CAGRs over the past three years, respectively. Moreover, its levered FCF has increased at a 38.9% CAGR over the same period.

Discounted Valuation

In terms of forward non-GAAP P/E, ACI’s 6.91x is 63% lower than the industry average of 18.69x. The stock’s 0.29x forward EV/Sales is 83.3% lower than the industry average of 1.73x. Likewise, its forward EV/EBITDA multiple of 5.02 compares with the industry average of 11.94.

In addition, ACI’s forward EV/EBIT of 8.45x is 45.1% lower than the 15.39x industry average. Its 0.14x forward Price/Sales is 88.4% lower than the 1.23x industry average. Also, the stock’s forward Price/Cash Flow of 3.62x is 74% lower than the 13.96x industry average.

Favorable Analyst Estimates

Analysts expect ACI’s revenue for the fiscal 2023 third quarter (ending November 2022) to come in at $17.47 billion, indicating an increase of 4.3% year-over-year. The company’s consensus revenue estimate of $76.56 billion for the ongoing year indicates a 6.5% year-over-year increase. The company has surpassed the consensus revenue estimates in each of the trailing four quarters.

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 11.68%, 6.21%, and 4.63%, respectively. Also, its trailing-12-month asset turnover ratio of 2.69% is 231.1% higher than the industry average of 0.81%.

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. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. 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 multiples.

ACI is ranked #9 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 merger deal with KR is expected to deliver superior value to its customers, associates, and shareholders. Moreover, the company’s near-term prospects look bright, driven by steady product demand.

The company’s solid near-term growth prospects, growing dividends, and the defensive nature of its business make ACI an attractive buy now.

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), George Weston Limited (WNGRF) and Caseys General Stores, Inc. (CASY).

ACI shares were trading at $20.50 per share on Tuesday morning, down $0.01 (-0.05%). Year-to-date, ACI has declined -7.89%, versus a -17.81% 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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