Grocery stores like the Albertsons Companies (NYSE:ACI) aren’t a group that often comes to mind when investors think of making big gains. But that doesn’t mean they don’t belong in a well-diversified portfolio.
As we learned last year, owning companies in defensive sectors can really cushion the blow when the market dips. And since people will always need to shop, regardless of the economic environment, it doesn’t get any more defensive than food-related stocks.
Albertsons is one of the newest grocers to hit major stock exchanges. Its stock had a nice recovery in 2021, but was on a four-day losing streak ahead of this week’s earnings report. With the streak stretched to five after a disappointing prospect, it might be time to go on the attack with this defensive name.
What is Albertsons reporting for Q4 2020?
Albertsons has an unusual tax schedule as its fourth quarter of 2020 ended on February 27and of 2021. Same-store sales increased nearly 12%. Unsurprisingly, this was led by a massive increase in digital sales of 282%. Revenue growth would have been even stronger had fuel sales not fallen due to fewer cars on the road amid the pandemic. Adjusted earnings per share (EPS) came in at $0.60, which beat analyst consensus by a penny.
Fourth quarter and full year results (sales up 17%) were undeniably strong. In fact, it was a banner year for Albertsons and the company saw market share gains. Unfortunately, what stole the show were management’s comments around fiscal year 2021.
He said he expects identical sales to decline 6% to 7.5% in the new fiscal year, which would equate to a two-year cumulative growth of 9.4% to 10.9%. . However, the market ignored that last part, choosing to focus on the inevitable downturn in sales ahead. Adjusted EPS is expected to be between $1.95 and $2.05, a substantial pullback from the $3.24 recorded in fiscal 2020.
What are the technicians saying about the Albertsons?
Speaking of pullbacks, Albertsons shares are now 12.5% off their April 20 value.and intraday high of $20.89 after the sell off after earnings. The red candle of April 26and has a closing price that sits perfectly on the 50-day moving average where the stock will likely continue to receive support. Albertsons is a bargain investors should throw in their basket like an episode of the TV show “Supermarket Sweep.”
Given the limited trading history of Albertsons shares, few technical trends have emerged. There is, however, an active chart pattern that hints at a possible run from $24.10 to $25.00 by this summer. The Ascending Continuation Triangle formed on the daily chart on April 16and when Albertsons hit $20 for the second time. If the undervalued grocer can rebound again from its last slump, a price check could send it back into the $20s in no time.
Are Albertsons shares a buy?
The grocery store operator’s outlook for fiscal 2021 registered as “bearish” for the market, but a more appropriate assessment would have been “realistic.” After a year where extraordinary circumstances prompted extraordinary consumer behavior, why expect anything but tough comparisons to come in 2021?
Not only should management’s forecasts sound realistic, but it should be comforting to hear an honest assessment of what’s to come rather than exaggerated comments about unsustainable hyper-growth. Just because Albertsons and the grocery industry will face slowing growth as economic conditions normalize doesn’t mean they aren’t good investments.
There are positive undercurrents in Albertsons’ business model that suggest it can still generate respectable grocery-like growth over the long term. In a space notorious for ultra-low margins, Albertsons has managed to boost margins despite an influx of COVID-19-related expenses. Cash flow was strong in 2020, which also indicates strengthening operational performance.
Additionally, the company has taken market share from competitors who have failed to adapt to the ongoing digital transformation in the grocery industry. The balance sheet is also strengthening due to Albertson’s commitment to debt reduction. Its net debt ratio has been nearly halved to a very manageable 1.5x in fiscal 2020. Additionally, Albertsons has an active share buyback program and offers a dividend yield at 2.2% term.
For these reasons, Albertsons’ cautious outlook for 2021 should not scare off investors. In fact, for those with a vision of more than three years, it should do the opposite. As long as people continue to eat, Albertsons’ portfolio of strong grocery brands and growing technology platforms will provide defensive growth for the portfolio over the long term.
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