Albertsons (NYSE: ACI) Has Flaws, But It’s Worth More Than 7x Earnings

The S&P 500 is trading at around 22x earnings. Albertsons NYSE: ACI is trading at around 7x projected earnings for its fiscal year ending February 2021. I am not going to make the argument that Albertsons will triple and reach a P/E ratio that is in line with the average. Because that’s not going to happen. Nor should it.

Albertsons should be trading at a discount; it’s facing a lot of obstacles that will make it tough to maintain – let alone grow – its earnings. But the sell-off since the June IPO has been overdone, and Albertsons is ripe for a multiple expansion.

This piece will address three common concerns keeping Albertsons down. Though legitimate, they are mostly overblown.

Concern #1 - Growth Will Reverse Post-COVID

Albertsons’ comp sales increased 26.5% last quarter, led by a 276% surge in e-commerce. The comp and e-commerce gains both outpaced Kroger NYSE: KR, one of Albertson’s peers.

Albertsons’ drive-up and go (DUG) service is now a part of more than 700 stores, and the company plans to implement it in 1,400 by the end of this fiscal year. Albertsons has around 2,250 supermarkets in 34 states, so that year-end number represents more than 60% of all stores.

That’s all well and good, but what’s going to happen to revenue and earnings post-COVID?

Revenue is expected to see a modest contraction next year, and earnings are expected to dip from $1.86 per share to $1.53 per share. Not ideal, but the stock would still be trading at just 9x earnings.

Personally, I think the expectations for a post-COVID contraction may be overstated; a lot of people are going to be working at homelong-term – at least part-time – and those people are going to continue buying more groceries.

Concern #2 - The Competition is Heating Up

The U.S. grocery market is worth around $1 trillion, and unsurprisingly, it has attracted a lot of competition. Formidable competition.

Amazon NASDAQ: AMZN has loomed large for years. Recently, Walmart NYSE: WMT introduced its Walmart+ service, which allows same-day and unlimited delivery for $98 a year. Costco NASDAQ: COST and BJs NYSE: BJ are two more…

There’s no way around it: Albertsons is going to have its hands full.

But we’re not talking about a Blockbuster-esque company that’s going to get steamrolled by technologically superior alternatives. After all, Albertsons has a successful e-commerce segment of its own.

Also, the company can hang it hat on its private-label brands; they account for around 25% of sales and generate higher gross margins. Furthermore, the brands themselves offer some level of protection from the competition.

Concern #3 - Albertsons is Facing a $4.7 Billion Pension Deficit

Albertsons employs 270,000 workers – around 185,000 of them are unionized. The company, despite going public in June this year, was actually founded in 1939. Some of the pension plans were established before Albertsons’ current competition existed.

The company is taking steps to remedy the situation but this is going to be a drag for many years to come.

With that said, Albertsons’ EBITDA has been trending upwards and came in at over $4 billion over the past 12 months. The pension settlements will be painful, but the company can handle it.

Shares Could Have 30%+ Upside

Albertsons stock could increase 30% and shares would still be trading at a level that more than compensates you for the risk.

Right now, the market is overly worried about the downsides and overlooking the upside potential. To recap:

• Business might not slow down as much as anticipated post-COVID.
• Albertsons has proven e-commerce chops.
• The company’s private-label brands provide higher margins and protection.

Furthermore, even though Albertsons doesn’t currently pay a dividend, it plans to set a 40-cent annual dividend before the end of this year. That would equate to a 3% yield.

Albertsons’ dividend, in addition to its valuation, compares very favorably to the broader market. Look to get in before the rest of the market realizes this.