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Is Albertsons Undervalued?

GuruFocus.com
·3 min read

- By Nicholas Kitonyi

Shares of grocery stores company Albertsons Companies Inc. (NYSE:ACI) gained 1.5% on Tuesday following the announcement of its most recent quarterly results. The Boise, Idaho-based company announced its fiscal Q3, 2020 revenue and earnings before markets opened, which topped analyst estimates.

Is Albertsons Undervalued?
Is Albertsons Undervalued?


The company's market value has grown by more than 30% since Sep. 18. However, it is only up 6% since going public on June 26, at an IPO price of $16.00 per share. The stock appears to have fully recovered from the July-Sep plunge that saw it drop by nearly 19% early in its life as a public company.

Highlights from recent quarterly results

In the company's results for the 12 weeks ended Dec. 5, Albertsons' adjusted earnings per share grew by 175% to $0.66 up from the $0.24 posted for the 12 weeks ended Nov. 30, 2019. This was also better than the consensus analyst estimate of $0.35 earnings per share.

Albertsons' revenue for the period grew to $15.4 billion up from $14.1 billion boosted by 12.3% growth in identical sales, which benefitted from 225% growth in e-commerce sales.

The company's adjusted EBITDA margin improved to 6.3% in the most recent quarter compared to 4.5% in the quarter a year ago. This could play a crucial role in boosting Albertsons' earnings growth in the coming quarters.

Albertsons is one of the biggest companies based on revenue generated, but its net profit is far down the list. An improvement in profitability margins could help boost its market value. Its 40-week adjusted EBITDA of 6.7% compared to 4.4% reported a year ago suggests that the company is moving in the right direction.

Revenue for the first 40 weeks of the fiscal year 2020 came in at $53.9 billion up from $47 billion reported for the 40 weeks ended Nov. 30, 2019. Earnings per share for the 40 weeks ended on Dec. 5, posted an impressive growth of 269% to $2.62 up from $0.71 reported a year ago.

Albertsons issued an EPS guidance of $3.05 to $3.15 for the fiscal year 2020 up from the previous guidance of $2.75 to $2.85 earnings per share.

Valuation

From a valuation perspective, shares of Albertsons appear to be trading at an attractive price-earnings ratio of 10.51. In comparison, close peer Casey's Grocery Stores Inc. (NASDAQ:CASY) trades at a trailing P/E ratio of 20.97 while Grocery Outlet Holding Corp's (NASDAQ:GO) equivalent is 41.68.

On the other hand, The Kroger Co. (NYSE:KR) trades at a more compelling P/E ratio of 8.47. However, when we factor in expected earnings growth for the next five years, Albertsons' PEG ratio of 1.30 is better than Kroger's equivalent of 1.98. On the other hand, Casey's trades at a PEG ratio of 1.52, while Grocery Outlet has not provided earnings projections for the period.

In summary, shares of Albertsons appear to be relatively undervalued compared to close industry peers. The company's P/E ratio of 10.25 is also below the Peter Lynch fair valuation of P/E at 15.00. This could be a potential bargain in 2021.

Disclosure: No positions in the stocks mentioned.

This article first appeared on GuruFocus.