Is The Kroger Co. (KR) a Buy After The Recent Acquisition?

Kroger plans to finance this transaction with debt, and it would manage its free cash flow in an efficient manner to reduce the leverage from this merger. Kroger expected to maintain the net debt/EBITDA in the range of 2 – 2.20 in the next 18-24 months. The estimated annual cost savings would be $40-$50 million in the next 3-5 years, mainly from the benefits of Kroger’s scale. The net accretion to earning per diluted share was expected to stay in the range of $0.06-$0.09 per share. Kroger is trading at $37.60 per share, with a total market cap of $19.50 billion. The market values Kroger quite cheaply, at only 6 times its trailing EBITDA.

The world’s biggest retailer is Wal-Mart Stores, Inc. (NYSE:WMT), with a market cap of $254.40 billion. Wal-Mart Stores, Inc. (NYSE:WMT) is trading at $77.60 per share, with the highest EBITDA multiple of 8.3. Wal-Mart generated most of its revenue (55%) from Grocery, while Entertainment goods and Health & Wellness goods each accounted for 11% of its total sales in 2012. In the second quarter, Wal-Mart expected to generate around $1.22 to $1.27 in EPS, 3.4%-7.6% higher than the EPS of $1.18 in the second quarter last year.

Wal-Mart seems to deserve the highest valuation because of its highest profitability. In the past twelve months, Wal-Mart enjoyed the highest return on invested capital at 12.34%. Kroger ranked second with nearly 10.10% return on invested capital while Harris Teeter’s ROIC came in at only 6.62%. Income investors would like Wal-Mart the most with its highest dividend yield at 2.4%, whereas the dividend yields of Kroger and Harris Teeter are 1.6% and 1.2%, respectively.

My Foolish take

The acquisition of Harris Teeter would let Kroger expand its business in higher growth area and take advantage of Harris Teeter’s fresh reputation in the perishable department. The buyout valuation does not seem to be expensive either. Among the three, I like Wal-Mart the most because of its highest dividend yield and the most profitability.

The article Is Kroger a Buy After The Recent Acquisition? originally appeared on Fool.com and is written by Anh Hoang.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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