April’s Consumer Price Index (CPI) report showed that inflation cooled for the 10th consecutive month, with prices rising 4.9% year-over-year. Despite cooling down, inflation still remains above the Fed’s 2% target. The high inflation, strong jobs market, and tighter lending standards will likely push the economy into a recession.
Grocery stocks perform steadily during economic uncertainty as groceries are essential commodities that enjoy an inelastic demand. Therefore, amid fears of an impending recession, it could be wise to buy fundamentally strong grocery stocks Albertsons Companies, Inc. (ACI), Village Super Market, Inc. (VLGEA), and Natural Grocers by Vitamin Cottage, Inc. (NGVC).
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s likely to keep the stock market under pressure and how the grocery industry is positioned to survive.
The economy added 339,000 jobs in May, depicting the labor market’s strength. Moreover, the economy’s strength can be gauged from April’s 0.8% rise in consumer spending.
In addition, the core Personal Consumption Expenditure (PCE) index, which the Fed closely tracks to gauge inflation, rose 0.4% sequentially and 4.7% year-over-year in April. This spate of strong macroeconomic data increases the chances of another rate hike this month.
And any further rate hike could push the economy into a recession amid tighter lending standards.
The global online grocery market is expected to grow at a CAGR of 24.8% to reach $203.29 billion by 2029. The promising growth prospects of the industry and its inelastic nature should benefit the featured stocks.
Albertsons Companies, Inc. (ACI)
Albertsons Companies, Inc. ACI engages in the operation of grocery and drug stores. Its food and drug retail stores offer grocery items, everyday items, health and beauty care items, pharmacy supplies, fuel, and other goods and services. In addition, it creates and refines food products for retail sale.
On April 12, Albertsons Companies, Inc. announced a partnership with Apple that will enable the Apple Watch and iPhone's activity to be added to the ‘Sincerely Health’ digital health and wellness platform. The business wants to make a stronger effort to support its clients' physical well-being. ACI may experience increased demand as people continually strive to achieve their fitness goals.
In terms of forward EV/EBITDA, ACI’s 6.02x is 49.5% lower than the 11.94x industry average. Its 10.33x forward EV/EBIT is 32.3% lower than the 15.26x industry average. Likewise, its 0.33x forward EV/Sales is 79.3% lower than the 1.61x industry average.
ACI’s net sales and other revenue for the fourth quarter that ended February 25, 2023, increased 5.1% year-over-year to $18.27 billion. Its gross margin rose 2% over the prior-year quarter to $5.08 billion. Its adjusted net income increased 5.2% year-over-year to $459.70 million. The company’s adjusted EPS increased 5.3% over its prior-year quarter to $0.79.
Analysts expect ACI’s revenue for the quarter ended May 31, 2023, to increase 2.4% year-over-year to $23.87 billion. Its EPS for fiscal 2025 is expected to increase 1.7% year-over-year to $2.87.
Over the past three months, the stock has gained 3.2% to close the last trading session at $20.50.
ACI’s POWR Ratings reflect this positive outlook. ACI has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
ACI is ranked #6 out of 39 stocks in the A-rated Grocery/Big Box Retailers sector. It has a B grade for Value, Sentiment, and Quality. To see the additional POWR Ratings of ACI for Growth, Momentum, and Stability, click here.
Village Super Market, Inc. (VLGEA)
VLGEA operates a supermarket chain. Through physical stores and online retailers, it provides products for groceries, meat, produce, dairy, deli, seafood, prepared foods, bakery, and frozen foods, as well as for health and beauty care, general merchandise, liquor, and pharmacies.
In terms of trailing-12-month EV/Sales, VLGEA’s 0.28x is 83.3% lower than the 1.67x industry average. Its 13.05x trailing-12-month EV/EBIT is 28.1% lower than the 18.16x industry average. Likewise, its 0.14x trailing-12-month Price/Sales is 86.4% lower than the 1.05x industry average.
For the fiscal second quarter ended January 28, 2023, VLGEA’s sales increased 4.9% year-over-year to $563.87 million. Its gross profit rose 3.5% over the prior-year quarter to $154.88 million. The company’s net income increased 21.7% year-over-year to $12.32 million. Also, its Class A EPS came in at $0.85, representing an increase of 23.2% year-over-year.
Over the past month, the stock has declined 1.9% to close the last trading session at $21.23.
VLGEA’s POWR Ratings reflect solid prospects. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Value and Stability and a B for Growth and Quality. It is ranked first in the same industry. To see the other ratings of VLGEA for Momentum and Sentiment, click here.
Natural Grocers by Vitamin Cottage, Inc. (NGVC)
NGVC specializes in natural and organic groceries, dietary supplements, and related goods. Their stores sell a variety of products, such as organic produce, bulk food items, private label products, meat and seafood, dairy products and substitutes, prepared foods, bakery goods, alcoholic beverages, dietary supplements, body care items, pet care items, and household goods.
On May 5, 2023, NGVC announced plans to close two Dallas-Fort Worth area stores. NGVC’s Co-President Kemper Isely said, “We made the difficult decision to close two lower-performing stores, Fort Worth-North, and Coppell.”
The planned closure of these two stores will enable the company to streamline its operations.
In terms of forward EV/EBITDA, NGVC’s 10x is 16.3% lower than the 11.94x industry average. Its 13.06x forward non-GAAP P/E is 27.6% lower than the 18.04x industry average. Likewise, its 0.54x trailing-12-month EV/Sales is 67.7% lower than the 1.67x industry average.
NGVC’s net sales for the second quarter ended March 31, 2023, increased 4.2% year-over-year to $283.25 million. Its gross profit rose 7.4% year-over-year to $82.48 million. Also, its adjusted EBITDA increased 4.6% over the prior-year quarter to $16.81 million. In addition, its net income and EPS came in at $5.88 million and $0.26, respectively.
The company’s net cash provided by operating activities for six months ended March 31, 2023, increased 26.4% year-over-year to $34.86 million.
Analysts expect NGVC’s EPS and revenue for the quarter ending September 30, 2023, to increase 111.1% and 3.9% year-over-year to $0.19 and $285 million, respectively. The stock has gained 15.8% year-to-date to close the last trading session at $10.58.
NGVC’s POWR Ratings reflect this positive outlook. It has an overall rating of A, which translates to Strong Buy in our proprietary rating system.
It is ranked #2 within the Grocery/Big Box Retailers industry. It has an A grade for Stability and Sentiment and a B for Value and Quality.
To check NGVC’s POWR Ratings for Growth and Momentum, click here.
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ACI shares were trading at $20.70 per share on Monday afternoon, up $0.20 (+0.98%). Year-to-date, ACI has gained 0.96%, versus a 12.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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