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I assign a Hold investment rating to Albertsons Companies, Inc. ( ACI ), which describes itself as “one of the largest food and drug retailers in the United States” in the company’s media releases . According to its corporate fact sheet , ACI is ranked among the top two grocery companies in over two-thirds of Metropolitan Statistical Areas or MSAs, and it boasts a retail network of more than 2,200 stores.
Albertsons’ forward P/E multiple has compressed from the mid-teens level in early-December to a more reasonable low-teens figure now. The company’s investment in initiatives to boost productivity might be a drag on its FY 2022 profitability, but could help to expand its profit margins in the medium term. Considering these factors, I view ACI as a Hold.
Note that Albertsons defines fiscal 2021 as the financial period between the beginning of March 2021 and the end of February 2022 as per its results announcements , and I will be using this definition for this article. ACI Stock Price Correction
Albertsons’ share price has corrected by -18% from its 52-week high of $37.85 recorded on the December 7, 2021 trading day to $30.94 at the close of January 14, 2022.
Also, ACI’s most recent quarterly top line and bottom line beat the market consensus’ forecasts by +4% and +38% , respectively as per the company’s Q3 FY 2021 financial results press release issued on January 11, 2022 before trading hours . But Albertsons’ shares still declined by -10% from $31.90 as of January 10, 2022 to $28.79 as of January 11, 2022 post results announcement.
In my opinion, there are a number of reasons that might explain ACI’s recent stock price weakness.
Firstly, Albertsons’ premium valuations relative to its closest peer, The Kroger Co. ( KR ), could have resulted in the pullback in ACI’s shares in the past one and a half months.
The trailing twelve months’ revenue for Kroger and Albertsons were $135.6 billion and $70.3 billion, respectively according to S&P Capital IQ. This implies that KR is almost twice as large as ACI in terms of revenue base, and Kroger should command a valuation premium over Albertsons by virtue of being relatively bigger with respect to scale.
On December 7, 2021 which is the day ACI reached a new 52-week high, Albertsons’ consensus forward next twelve months’ P/E multiple was 14.4 times which was +9% higher than Kroger’s forward P/E multiple of 13.2 times. In contrast, ACI was valued by the market at 11.3 times forward P/E as of January 14, 2022, which represented a discount to KR’s forward P/E of 14.5 times on the same day. The historical valuation data for both companies were sourced from S&P Capital IQ.
In other words, Albertsons’ valuation premium over Kroger in early-December 2021 was probably viewed by the market as unsustainable, and this eventually led to ACI’s share price underperformance in the recent one and a half months.
Secondly, selling pressure from Albertsons’ convertible preferred stock holders might be another issue which became a drag on the company’s shares.
ACI revealed in its recent Q3 FY 2021 financial results press release that “15% of the convertible preferred stock outstanding” as of end-3Q FY 2021 were converted to “Class A common stock” between December 5, 2021 and January 10, 2022.
It is natural to assume that most if not all of ACI’s convertible preferred stock holders will be inclined to sell their common stock post-conversion. With the vast majority of convertible preferred stock yet to be converted, this creates an overhang for Albertsons’ shares.
Thirdly, there might be concerns about weaker revenue growth and lower profit margins for Albertsons in FY 2022, which I detail in the next section. Albertsons’ Financial Outlook For Fiscal 2022
Based on sell-side consensus estimates obtained from S&P Capital IQ, the market expects Albertsons’ top line growth to slow from +2.1% in FY 2021 to +1.3% in FY 2022, while ACI is forecasted to see its normalized net profit margin contract from 2.3% to 2.1% over the same period. As I highlighted at the start of the article, ACI’s FY 2021 and FY 2022 refer to the respective financial years ended February 28, 2022 and February 28, 2023 as per the company’s definitions.
The market’s expectations of more moderate revenue expansion and weaker profitability for fiscal 2022 are reasonable in my opinion.
With regards to future top line expansion, the Supplemental Nutrition Assistance Program or SNAP, and vaccines-related revenue are in the spotlight.
Forbes highlighted earlier in a September 10, 2021 […]
source Albertsons: All Eyes On Share Price Correction And 2022 Outlook
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