Forget Kraft: Here's My Top Groceries Stock

The food products industry is on the cusp of a major shakeup. As I write this, shares of Kraft Foods Group (KRFT) are surging 35% on news that it’s merging with H.J. Heinz Co.

With $28 billion in projected annual sales, The Kraft Heinz Co. will be the third largest food and beverage player in North America, and the fifth largest in the world. The combined company will also have eight billion-dollar brands, and five between $500 million and $1 billion. Both Berkshire Hathaway and 3G Capital, Heinz’s current owners, have given their blessing with this merger, having agreed to invest an additional $10 billion in the new company.

To be sure, this is big news for the food and beverage industry, but I wouldn’t buy into the hype just yet.

Prior to the announcement, KRFT shares were barely holding on to a C-rating in Portfolio Grader. For starters, KRFT fails on five of the eight fundamental metrics I graded it on: Sales Growth (D), Operating Margin Growth (F), Earnings Growth (F), Earnings Momentum (F) and Cash Flow (D). For the current quarter, Kraft is expected to post just 1.7% annual sales growth and a 2.4% year-on-year drop in earnings. With 13% of its company-wide revenues coming outside of the U.S., the stronger dollar weighs on Kraft’s bottom line.

And with sales in 200 countries around the world, H.J. Heinz is the most global of all U.S.-based food companies. So it is also susceptible to the stronger dollar. Last year, unfavorable foreign exchange rates reduced Heinz’s sales by 2%. The dollar shows no sign of weakening against the world’s major currencies, so I expect this trend to continue.

Given its international footprint, the combined company is going to have a hard time growing sales and earnings. For this very reason, lately I have been avoiding multinational companies and focusing instead on strong domestic plays. So if you’re looking to add a food and beverage play to your portfolio, I have another recommendation for you:

Buy This Instead: Kroger

Kroger Co. (KR) is one of the nation’s largest retail grocery chains, with 2,631 supermarkets across 34 states. The Kroger umbrella also covers nearly 1,200 gas stations, 800 convenience stores, over 300 jewelry stores and 37 food processing facilities. As a U.S. company, Kroger isn’t impacted by the stronger dollar, so it has enviable sales and earnings prospects.

A few weeks ago, the grocery chain trounced expectations for the fourth quarter. Compared with the year ago quarter, net earnings jumped 22.7% to $518 million, or $0.14 per share. Adjusted net earnings were $1.04 per share. Analysts were predicting adjusted net earnings of $0.90 per share, so Kroger posted a healthy 15.6% earnings surprise. Over the same period, total sales climbed 9% to $25.21 billion, also beating the $25.13 billion consensus estimate. Excluding fuel sales, total sales jumped 14.2% over last year.

Looking ahead to FY 2015, Kroger is targeting net earnings between $3.80 and $3.90 per share. Following the strong earnings report, analysts hiked up their 2015 EPS outlook to $3.88, translating to 10.2% annual earnings growth.

As an added bonus, KR has a modest 0.9% annual dividend yield. The stock goes ex-dividend on May 13, so shareholders of record will receive $0.185 per share on June 1. KR is an A-rated Strong Buy.

Sincerely,

Louis Navellier

Louis Navellier

More Louis Navellier

Twitter

Facebook

RSS Feed

Little Book

InvestorPlace Network

InvestorPlace.com