The stock market has experienced a broad-based sell-off since the beginning of the year. The uncertainty surrounding the economy has led to many investors sitting on the sidelines, waiting for the right opportunity to invest their extra cash.

To that end, food and drug retailer Albertsons Companies, Inc. (ACI) could be a good choice, given its promising prospects.

On October 14, ACI and supermarket operator Kroger (KR) entered a definitive agreement to merge and create the country's biggest standalone grocery chain with more than $200 billion in annual revenues.

ACI’s shareholders are expected to receive total consideration valued at $34.10 per share. Chan Galbato, Co-Chair of ACI’s Board of Directors and CEO of Cerberus Operations, said, “This transaction with Kroger provides substantial value to shareholders and exciting opportunities for associates to be part of a combined organization with the ability better to support the lives and health of millions of Americans.”

Apart from the special dividend of $6.85 per share announced after the signing of the merger agreement, ACI’s Board has declared a dividend of $0.12 for the third quarter of 2022. The dividend is payable on November 14, 2022. It has a four-year average yield of 1.45%.

The company has delivered a strong performance in the last reported quarter. ACI’s CEO Vivek Sankaran said, “Our team continued to deliver strong performance during the second quarter. Throughout the quarter, we continued to invest in our digital transformation, our differentiation in Fresh, and the modernization of our capabilities.”

“As we look ahead to the balance of the year, we believe we are well-positioned to further accelerate in each of these areas as we continue to roll out our Customers for Life strategy. With ongoing productivity to support our investments and to cushion inflationary and consumer headwinds, we will continue to prioritize our investments in deepening our relationships with our customers and communities. Our teams’ commitment to serving our customers is driving our performance while furthering our purpose to bring people together around the joys of food and to inspire well-being,” he added.

Shares of ACI have declined 32.5% in price year-to-date and 32.6% over the past year to close the last trading session at $20.38. However, Wall Street analysts expect the stock to hit $31.28 in the next 12 months, indicating a potential upside of 53.6%.

Robust Financials

ACI’s net sales and other revenue increased 8.6% year-over-year to $17.92 billion for the second quarter ended September 10, 2022. The company’s adjusted net income increased 13.2% year-over-year to $418.30 million.

Its adjusted EPS came in at $0.72, representing an increase of 12.5% year-over-year. In addition, its adjusted EBITDA increased 8.6% year-over-year to $1.04 billion.

Mixed Analyst Estimates

ACI’s EPS for fiscal 2023 and 2024 is expected to decline 4.5% and 1.3% year-over-year to $2.58 and $2.54, respectively. Its revenue for fiscal 2023 and 2024 is expected to increase 6.5% and 1.4% year-over-year to $76.56 billion and $77.64 billion, respectively.

High Profitability

In terms of trailing-12-month ROCE, ACI’s 45.44% is significantly higher than the 12.17% industry average. Likewise, its 5.93% trailing-12-month ROA is 28.2% higher than the industry average of 4.63%. Furthermore, the stock’s trailing-12-month asset turnover ratio came in at 2.69%, compared to the industry average of 0.81%.

Discounted Valuation

In terms of forward non-GAAP P/E, ACI's 6.86x is 62.8% lower than the 18.46x industry average. Its forward EV/EBIT of 8.47x is 44.2% lower than the 15.18x industry average. In addition, its 0.29x forward EV/S is 82.9% lower than the 1.69x industry average.

POWR Ratings Show Promise

ACI has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ACI has an A grade for Value, in sync with its discounted valuation.

It has a B grade for Quality, consistent with its high profitability.

ACI is ranked #8 out of 38 stocks in the A-rated Grocery/Big Box Retailers industry. Click here to access ACI’s Growth, Momentum, Stability, and Sentiment ratings.

Bottom Line

Stable product demand and its strategic merger with KR brighten ACI’s near-term prospects. Moreover, Wall Street analysts expect the stock to see a solid upside in the upcoming months.

Therefore, investors with surplus cash can consider buying the stock, given its robust financials, high profitability, and discounted valuation.

How Does Albertsons Companies, Inc. (ACI) Stack Up Against its Peers?

ACI has an overall POWR Rating of A, equating to a Strong Buy rating. Check out these other stocks within the Grocery/Big Box Retailers industry with an A (Strong Buy) rating: Ingles Markets, Incorporated (IMKTA), Village Super Market, Inc. (VLGEA), and Casey's General Stores, Inc. (CASY).

ACI shares were trading at $20.45 per share on Friday morning, up $0.09 (+0.44%). Year-to-date, ACI has declined -8.66%, versus a -17.78% rise in the benchmark S&P 500 index during the same period.

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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