Wal-Mart Stores, Inc. (WMT): This Grocer Is Expanding its Reach

It seems that this kind of move from a traditional grocer would signal that the stock is likely overvalued. The Kroger Co. (NYSE:KR) had owner earnings in 2012 of about $1.58 billion, or $3.03 per share. The Harris Teeter Supermarkets Inc (NYSE:HTSI) deal will add maybe $100 million to this total, bringing the per share number up to $3.23. The debt will total $10 billion after the deal, which comes out to about $19 per share. Adding this debt to the market price the EV/OE, or enterprise value divided by owner earnings, is 17.6.

That’s a high price to pay for a traditional grocer. This isn’t Whole Foods we’re talking about, which grew revenue by nearly 16% in 2012 and has more than doubled its margins. This isn’t Wal-Mart Stores, Inc. (NYSE:WMT), which uses groceries to bring people into the store and sell them higher-margin products. This a traditional grocery chain.

For comparison, Wat-Mart has an enterprise value of about 20 times owner earnings. The Kroger Co. (NYSE:KR)’s multiple should be nowhere close to that of Wal-Mart Stores, Inc. (NYSE:WMT), but it’s not far off at its current price. It seems that investors are getting excited about grocery stores, sending Kroger’s shares flying, while forgetting that it’s a grocery store.

The bottom line

Back when The Kroger Co. (NYSE:KR) was trading in the low-20’s the stock was inexpensive. But now, after an 80% rise, it just doesn’t make sense to buy Kroger, Harris Teeter Supermarkets Inc (NYSE:HTSI) deal or not. Goldman Sachs recently downgraded the stock for being too expensive, and I tend to agree. Kroger is a fine company, and the Harris Teeter deal, while expensive, is likely a good move, but paying such a high price for a traditional grocer is a bad idea.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market (NASDAQ:WFM). The Motley Fool owns shares of Whole Foods Market. The article This Grocer Is Expanding its Reach originally appeared on Fool.com.

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