In Focus: Amazon and Kroger
First and foremost this isn't an Amazon versus Kroger article. This week we look at these two titans of industry because they recently made the Wall Street news cycle.
Balancing the Interest of Wall Street and The Common Man & Woman
Amazon announced this week that it will raise its minimum wage to $15 per hour for it's employees. Was this Amazon caving to political pressure or an attempt to keep quality workers? Whatever the reasons, the higher expenses and lower expected profits motivated Wall Street and investors to sell Amazon's stock after the announcement.
Amazon's stock declined each trading day following the minimum wage increase announcement on October 2, 2017. The $50 billion plus in lost market cap proves to us again that what is good for the common man doesn't align with what is good for shareholders and Wall Street. To the common man increased wages are greater than corporate profits, to wall street, higher net earnings are greater than increased wages.
We still believe Amazon is Buy, and the recent pull back allows motivated investors to buy Amazon's stock on sale. The company's revenue continues to grow and an Amazon investment gives investors exposure to multiple industries, retail, consumer electronics, cloud services, music and movie streaming, and healthcare to name a few. All of that and Amazon's CEO Jeff Bezos is likely eyeing more industries to enter and disrupt. Amazon is a Buy.
Food for Drugs?
Kroger announced a partnership with Walgreens during the week that will allow Kroger shoppers to order online and pickup groceries at Walgreens. The program will be tested out in13 Walgreen locations in the Cincinnati area where Kroger's is based. Good idea? It appears so. Kroger gets another distribution channel for it's branded products (supermarkets make a higher profit margin on their own products). We've seen speculative reports that in return Walgreens could get Kroger's pharmacy business, which accounted for almost 9% of Kroger's revenue in 2017.
Source: Kroger 10K
Kroger has made a few strange moves since Amazon purchased Whole Foods. Kroger announced an in-grocery store restaurant and a clothing line months after the Amazon-Whole Foods deal. We weren't in love with either announcement but suggested the stock was a buy in the low $20 price range back in 2017. Our recent review of Kroger took place before the Kroger-Walgreens announcement, and the results didn't suggest a new investment in Kroger.
More than ever grocery stores will need to be customer service oriented. Low prices are great, but consumers are looking for low prices, online ordering, and easy pick-up and/or delivery. Kroger is a good company but the current stock price seems to be the fair market price for the stock. Right now we view Kroger as a Hold.
So we have a Buy on Amazon, because Amazon continues to grow revenue and Jeff Bezos continues to push the company into new markets without a hiccup. The increase in wages and the lost market value following the announcement will be an insignificant blip on the stocks rise to $2,500 per share. Kroger we have as a hold. We like the deal with Walgreens and we're aware of it's growing digital sales, but we feel at this time the stock is trading at a fair price.
If you're a new investor looking to get started or an experienced investor looking for great investment ideas we suggest you check out our quarterly investment newsletter, The Seville Report.
May your next investment be your best investment.