Albertsons: Grocery Chains Shouldn't Trade At These Multiples

Core Viewpoint - Albertsons Companies, Inc. is experiencing stable financial performance as an independent entity, despite a proposed merger with Kroger facing significant regulatory scrutiny and skepticism from the market [2][6][14] Financial Performance - Albertsons' revenue has grown by 32.8% since FY2016, comparable to Kroger's 30.1% and Walmart's 33.4% [4] - The operating margin for Albertsons in FY2023 is 3.0%, lower than Kroger's 3.3% and Walmart's 4.2%, but has shown good margin expansion [4][5] - Return on capital for Albertsons stands at 8.8%, above the consumer staples sector median of 6.8% [5] Merger with Kroger - Kroger's acquisition offer for Albertsons is priced at $34.1 per share, but the stock is currently trading 35% below this price, indicating market skepticism about the merger's success [6] - The FTC has filed to block the merger due to concerns over pricing power, with various stakeholders expressing opposition [6][14] - Kroger and Albertsons have agreed to sell 579 stores to C&S to improve merger prospects, but market sentiment remains cautious [6] Valuation - Albertsons trades at a forward normalized P/E of 8.1, significantly lower than Kroger's 11.7 and Walmart's 27.7, indicating a potential upside of 45% to 242% [7] - The DCF model estimates a fair value for Albertsons at $38.44, suggesting a 90% upside from the current stock price [9][14] Market Position - Despite the ongoing merger challenges, Albertsons continues to perform on par with other grocery chains, maintaining a stable operational profile [14] - The valuation gap compared to peers and the consumer staples sector indicates that Albertsons is undervalued, presenting a strong investment opportunity [7][14]