The Albertsons Companies (NYSE: ACI) IPO came and went without much notice, but I found it very intriguing. Albertsons is based in the United States and owns over 2,200 supermarkets. Some of their well-known brands include Albertsons, Safeway, Vons, Shaw’s, and Pavilions.
According to Statista, Kroger (NYSE: KR) and Albertsons are number two and three in grocery market share. Walmart (NYSE: WMT) is number one. But unlike Walmart, Kroger and Albertsons are pure-play grocers.
Unlike the high flying IPOs and mergers in the past few weeks like Nikola Corporation (NASDAQ: NKLA) and Tortoise Acquisition Corp (NYSE: SHLL), Albertsons IPO was pretty lackluster.
These are seven reasons why I ended up buying Albertsons on the first day of the IPO.
1. Berkshire Hathaway (BRK.B) finds value in groceries
Earlier this year, Berkshire Hathaway revealed that they had started a $549 million stake in Kroger. According to Buffett, this purchase was made by one of his lieutenants. Berkshire Hathaway was our June 2020 stock of the month pick.
It’s not a good idea to blindly follow what other money managers are doing, but it is wise to take notice and try to figure out why they make the moves that they make. And I think that food delivery is the key to their purchase.
There’s no way that Berkshire could have known a 100-year pandemic would hit the world. But it’s eerily prescient that they made the purchase of this essential business right at the start of it.
We’re still at the early stages of food delivery. With the pandemic upon us, it’s clear that food delivery is essential for social distancing and keeping the coronavirus in check.
I believe that the large investor interest in Kroger could translate to interest in Albertsons.
2. IPO Price Reduction
The IPO was originally expected to price at $19.00 per share. In the eleventh hour, the price was changed to $16.00 per share. Yesterday (July 6, 2020), the stock closed at $15.52. I believe that the stock is worth approximately $22.11 using a rough comparison to Kroger stock, which closed at $33.73.
In the following table, I make a comparison of revenues and operating income based on the latest 10-K statements (February 2020). I also compare the number of stores listed on their investor relations sites. Based on this rough comparison, I think that ACI might be 30% undervalued.
3. Stay at Home Boost
The coronavirus pandemic has most of the U.S. on lockdown. With restaurants closed, more people are buying food from the grocery stores. Albertsons is a direct beneficiary of the stay-at-home orders. They had a 47% increase in sales in March and 21% in April. (Source: Earnings conference call)
Although this may be temporary, I think that consumer behavior will be changed at least for the next one to two years. This could be a big windfall for Albertsons and other grocers that have a food delivery network.
4. Collaboration with Instacart
Speaking of food delivery, Albertsons is able to take full advantage of stay-at-home and social distancing orders through its partnership with Instacart. People can just order groceries online and receive it at their doorstep within a couple of hours.
5. Smart, Experienced CEO and Leadership Team
The CEO of Albertsons is Vivek Sankaran. He is the former CEO of PepsiCo Foods North America. Albertsons has a very talented and experienced leadership team.
You can read more about Mr. Sankaran and the rest of the company’s leadership team on their investor relations site.
6. Paying down debt aggressively
In February 2017, ACI had $11.2 billion in total debt. They’ve paid it down very aggressively. As of February 2020, the total debt is down to $8.7 billion.
Management is serious about paying down debt and mentioned it as a priority in their earnings call. In general, I like companies that prioritize debt repayments. It is one of the best ways to strengthen the balance sheet and it shows that they are good stewards of capital.
According to their S1 filing, Albertsons plans to pay a dividend. This is nice because dividend investors can give the stock price a support level. Given the meager returns of U.S. Treasuries, I think that the dividend policy in addition to solid business fundamentals will entice big institutions and money managers.
So what do you think about Albertsons Companies? Let me know in the comments section.
I/we own shares of ACI, BRK.B
Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies whose stocks are discussed in this article.
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Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.
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