This Goldman downgrade mistaken, says Cramer
The Mad Money host doesn't think analysts at Goldman Sachs got this one right – not by a long shot.
"I'm referring to Goldman's decision to downgrade Kroger to sell from hold because they see softness in the broader industry and they think Kroger in particular is too expensive."
The Mad Money host has one word for those Goldman analysts. Wrong!
"Just last week Kroger did something that makes me a real believer in this company's future, not to mention in the ability of its stock to go higher," he said.
That is, Kroger announced plans to acquire Harris Teeter, a chain of high-end markets mostly located in the southeast and mid-Atlantic region. The move puts Kroger in three additional states.
So if this deal makes so much sense, how come Goldman Sachs immediately downgraded Kroger to sell just a few days later?
Cramer thinks there are 3 reasons:
1) Many other supermarket chains aren't doing too well. "Safeway, for example is in lousy shape," Cramer said. Goldman may have over-generalized.
2) The industry trend is toward organic. "In this sense, Kroger is an odd duck," Cramer said. "It's a non organic name that's actually doing very well."
3) Kroger doesn't have snob appeal. This last reason may be the most misguided. "Kroger is where real people go to shop. But for many of the Wall Street analysts who live in New York City, the stores might as well not even exist. These analysts shop at Whole Foods and Fairway—they don't have a clue about Kroger," Cramer said.
And the Mad Money host thinks the Street's snobbery is your gain. That is, Goldman and perhaps the entire Street may be missing what Cramer believes will be a fabulous story.
"Although Harris Teeter has only has 212 locations across 8 states, there is hardly any overlap with Kroger's store base, and this deal will allow them to expand in the southeast, especially in the growing cities of North Carolina, and the mid-Atlantic," Cramer said.
"Also, the acquisition should generate $40 to $50 million in synergies over the next three or four years, and estimates may even be conservative."
"And this transaction tells me that Kroger is serious about building out a truly national footprint. The company has a strong enough balance sheet to do more smart deals, just like this one, in order to move into new markets and eliminate competitors," Cramer added.
All told, Cramer doesn't think the stock is a sell or even a hold. Cramer thinks it's a buy.
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"Sure, the stock has had a monster move lately, up 44% year-to-date," Cramer admitted but despite the gain Cramer said it's still cheap.
"Kroger's trading at just 12.2 times next year's earnings estimates with a 9% long-term growth rate, not at all expensive when you consider the consistency of the company's earnings," he said.
And he likes the potential for increasing margins. "Kroger has the most exposure to private label store brand products in the business. This is hugely important, because private label products carry gross margins that are 10 to 15 percentage points higher than nationally branded products, and mean much greater profits," he added
What's the bottom line?
Cramer thinks analysts at Goldman Sachs had their noses so high in the air, they took their eyes of the ball. "Snobs will miss this," Cramer said, "but I'd buy some Kroger the next time we get a market-wide pullback."
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