Thinking of Selling ACI After Yesterday's Rally? Consider This First.

Albertsons Companies Inc.’s stock price surged 11.5% yesterday on rumors (that have since been confirmed) of a merger with fellow grocery chain Kroger. Ending the day at $28.63, ACI shares outperformed the S&P 500 and Dow Industrial composite indices by 8.9% and 8.7% respectively, but are still well below their 52 week high of $37.99. Over the last 12 months, Albertsons Companies is down 10.1%, and has outperformed the S&P 500 by 9.9%. Now, thelarge-cap Consumer Defensive company is 17.52% below its average target price of $34.71 and has an average analyst rating of buy.

Albertsons Companies's trailing 12 month price to earnings (P/E) ratio is 10.4, which is its share price divided by its trailing earnings per share (Eps) of $2.76. The company has a forward P/E ratio of 9.7 based on its forward Eps of $2.94 -- which is an estimate of future earnings provided by management. The P/E ratio tells us how much investors are willing to pay for each dollar of the company's net earnings from its sales operations. By way of comparison, the average P/E ratio of the Consumer Defensive sector is 24.21, but a company's price can remain stable for a long time even if it is over or undervalued.

Company accountants calculate earnings by subtracting the costs of sales and overhead from its revenues. These metrics focus on the sales side of the company only -- it's important to remember that companies can have many other costs and sources of income that are independent from its core business. For example, a company may have extensive expenses such as rent and debt servicing, and on the other hand it may receive additional income from its investments and intellectual property.

So the earnings picture only shows a slice of the company's financial health. They also don’t represent actual inflows of cash, since revenues are calculated on the basis of product or service deliveries, as opposed to actual payments received. The importance of earnings is that they enable us to analyze the company’s growth and profitability over time.

Here is an overview of Albertsons Companies’ operating margins, which are the percentage of net profit compared to total revenues:

  • 2021 operating margins: 2.9 %
  • 2020 operating margins: 1.6 %
  • 2019 operating margins: 1.0 %
  • 2018 operating margins: 0.1 %
  • Average operating margins: 1.4 %
  • Average operating margins growth rate: 387.2 %
  • Coefficient of variability (the lower the better): 85.5 %

Let’s contrast the operating margins with an overview of Albertsons Companies’ gross margins, which only take into account expenses directly related to producing revenue (i.e. without overhead):

  • 2021 gross margins: 29.4 %
  • 2020 gross margins: 29.8 %
  • 2019 gross margins: 28.8 %
  • 2018 gross margins: 28.6 %
  • Average gross margins: 29.2 %
  • Average gross margins growth rate: 0.9 %
  • Coefficient of variability (the lower the better): 1.9 %

An alternative form of measuring a company's valuation is to focus on its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. Book value represents the amount of money that would be available to equity holders if the company were to sell all of its assets and pay off all of its debts today. Albertsons companies P/B ratio of 3.7 indicates that the market value of the company exceeds its book value by a factor of 4.0, indicating the company may be undervalued compared Consumer Defensive sector’s average P/B ratio of t 4.09

ACI's average free cash flow over the last few years is $1,233,325,000.0, which represents the sum of inflows and outflows of cash from all sources, including capital expenses.. This is the pool of liquidity that the company can use to reinvest in its business or pay out to its equity investors in the form of a dividend. Over the last twelve months investors in Albertsons Companies have enjoyed a dividend yield of 1.8%.

Owing to its a very low P/E ratio, a lower P/B ratio than the sector average, an irregular stream of positive cash flows, and None, Albertsons Companies is probably undervalued at current prices. Make sure to complement this brief quantitative review with a qualitative analysis of your own!

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.