Here are eight grocery stocks that Bank of America loves.
Bank of America analyst Robert Ohmes recently put together his version of a grocery and food stock shopping list for long-term investors. Ohmes says the key theme in the grocery space remains what he calls the “discount store decade,” an extended U.S. demographic shift that includes the rise of budget-conscious millennial shoppers and a more frugal aging baby boomer generation. This year, he says investors should expect heavy investments in artificial intelligence and automation as retailers continue to build their omni-channel ecosystems and expand into ancillary businesses.
Walmart (ticker: WMT)
Ohmes says Walmart will continue to grow its online and same-store sales numbers in 2019 thanks to its aggressive omni-channel investments. Walmart is on track to bring online grocery pick-up to another 1,000 locations this year, targeting 3,000 total locations by year’s end. Ohmes says Walmart will also add to the 100 metro locations where it currently offers same-day delivery thanks to partnerships with Postmates and DoorDash. Ohmes says customers are also responding well to more than 2,000 new brand offerings. Bank of America has a “buy” rating and $115 price target for WMT stock.
Costco Wholesale Corp. (COST)
Costco reported impressive 6.1 percent same-store sales growth in December, including 7.5 percent U.S. sales growth. Ohmes says membership trends were solid in the most recent quarter, with membership fee revenue up roughly 10 percent. Costco has reported healthy trends in global renewal rates and membership households per store. Costco has added higher-end brands, invested in digital marketing and added multiple delivery options, all of which helped drive 26.2 percent adjusted online sales growth last quarter. Bank of America has a “buy” rating and $255 price target for COST stock.
Target Corp. (TGT)
Target recently reported holiday season same-store sales growth of 5.7 percent, up from 3.4 percent growth a year ago. The company also said online holiday sales were up 29 percent, above its full-year growth target of 25 percent. Ohmes says Target has demonstrated particular strength in its apparel, home and hardline sales. Target has focused on these higher-margin discretionary spending categories by launching new private label brands, with several more home and apparel brands set to launch in 2019. Bank of America has a “buy” rating and $100 price target for TGT stock.
Kroger Co. (KR)
Ohmes says the recently announced Kroger CFO transition is part of a thoughtful, planned management shift as the company pushes to hit its Restock Kroger targets. Kroger says the initiative will generate $400 million in earnings and $6.5 billion in cash flow, mostly from alternative profit streams such as precision marketing and personal finance. Ohmes says KR stock is a compelling risk/reward play given the potential for a $9 billion annual run rate in digital sales by the end of 2019. Bank of America has a “buy” rating and $37 price target for KR stock.
Dollar General Corp. (DG)
Ohmes says Dollar General has one of the best long-term growth profiles in the food and discount retail group. If the company is able to execute its strategy, Ohmes says investors can expect mid-single-digit store growth, low double-digit revenue growth, margin improvements and earnings multiple expansion. Dollar General plans to remodel 1,000 stores and open 975 new stores in fiscal 2020. It’s private label products and distribution optimization efforts have helped support margins as the company invests in growth. Bank of America has a “buy” rating and $120 price target for DG stock.
Dollar Tree (DLTR)
The Dollar Tree turnaround has taken longer than investors had hoped, but Ohmes says the multi-year effort will be worth the wait. Dollar Tree is renovating 1,000 Family Dollar stores in 2019 and opening 200 new stores. Ohmes says renovated stores typically see at least mid-single-digit boosts to same-store sales, but recently renovated stores have performed even better. Ohmes projects renovations will increase Dollar Tree’s overall same-store sales growth by 0.4 percent in fiscal 2020 and 0.7 percent in fiscal 2021. Bank of America has a “buy”rating and $100 price target for DLTR stock.
U.S. Foods Holding Corp. (USFD)
U.S. Foods is the second largest food service distributor in the U.S., holding about 9 percent of the total market share. Ohmes says that share should be on the rise in 2019 as earnings growth improves in a healthy environment. He says the company should be able to generate compound annual EPS growth of at least 25 percent from 2017 to 2020 due to strong revenue growth, a shift to higher-margin customers, cost-cutting opportunities, debt reduction and share buybacks. Bank of America has a “buy” rating and $39 price target for USFD stock.
BJ’s Wholesale Club Holdings (BJ)
After recently meeting with BJ’s Wholesale Club management at the ICR Conference, Ohmes says BJ’s membership renewal rate and fee revenue growth are trending in the right direction. Ohmes says BJ’s will likely report record membership levels for the fiscal fourth quarter even after raising fees roughly a year ago. Use of data analytics has allowed BJ’s to be more efficient with its discounted membership offerings and free three-month trial offers. Gross margins should benefit from improved sourcing, private label penetration and cost-cutting. Bank of America has a “buy” rating and $35 price target for BJ stock.
Grocery stocks recommended by Bank of America.
These are eight grocery stocks that Bank of America loves right now:
— Walmart (ticker: WMT)
— Costco Wholesale Corp. (COST)
— Target Corp. (TGT)
— Kroger Co. (KR)
— Dollar General Corp. (DG)
— Dollar Tree (DLTR)
— U.S. Foods Holding Corp. (USFD)
— BJ’s Wholesale Club Holdings (BJ)
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8 Best Grocery Stocks in the Discount Decade originally appeared on usnews.com
