Stocks to watch? Kroger, Macy's and P&G all have gas left in tank, experts say

Macy's already eclipsed last year's record high

CINCINNATI -- Cincinnati’s three biggest companies surged to all-time highs in the stock market last year. U.S. consumers will have a lot to say about whether the party continues in 2014.

“You’ve got three different stories, but they all relate to the consumer,” said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in downtown Cincinnati. “If the economy improves, the market continues to go up and people are feeling resilient -- all three of them are going to work.”

One week into the new year, Macy’s has already proven there is gas left in the tank. The department store giant surprised investors with a cost-cutting program that includes 2,500 layoffs, five store closures and $100 million in annual savings. Macy’s shares hit an intra-day high of $56.12 on Jan. 8, nearly 4 percent higher than its Nov. 29 peak of $54.07. Macy’s closed Friday at $55.84.

Analyst Charles Grom raised his 12-month price target to $62 for Macy’s, saying it was “firing on all cylinders” during the crucial holiday sales season and the restructuring puts the company in a position to deliver positive earnings surprises in 2014.

“When all is said and done, we believe (Macy’s) has the franchise strength, management talent and balance sheet to keep shareholders happy,” Grom wrote.

Procter & Gamble has room for stock-price improvement because it has yet to demonstrate that internal changes launched in 2012 will lead to increased earnings.

P&G hit an all-time high of $85.82 on Nov. 25, but has since retreated to the $80 range. Analysts following P&G have a wide range of 12-month stock price targets, from a low of $76 to a $97 on the high end. P&G closed Friday at $80.30.

“Much of the (increase was) directly related to the stock market, not P&G specifically,” said Bernstein Research analyst Ali Dibadj. “If it starts to deliver, then there is more gas left” in a P&G rally.

Analysts are looking for P&G to accelerate sales and profit growth in the next few years. Some think the company should sell off slower-growing business units and reinvest in categories that offer more potential. P&G has signaled beauty care as a major area of focus , but it’s not yet clear how a series of new product launches are performing.

P&G’s beauty unit faces new pressure in China , where rivals Revlon and L’Oreal Garnier have announced plans to exit the market in the wake of slowing economic growth.

Still, Deutsche Bank analyst Bill Schmitz isn’t counting P&G out, with a $90 price target and buy rating on the stock.

“We appreciate how powerful the P&G innovation and go to market engine is when they actually have money to spend and aren’t spinning their wheels, as they have for the past few years, managing earnings and trying to placate investors,” Schmitz wrote in October.

For Kroger, the test in 2014 will be whether it can continue the growth it accomplished last year with a new CEO and a major geographic expansion. Rodney McMullen took the helm at Kroger Jan. 1, after four years as president and chief operating officer. When former CEO David Dillon announced the transition , he said McMullen “played a leadership role in every major decision Kroger has made for the past 25 years.” So, company observers expect no major strategy shifts for the Cincinnati-based grocery chain.

But there is a major deal to digest. By the end of this month, Kroger hopes to close on the $2.5 billion acquisition of the Harris Teeter grocery chain in Charlotte, NC. It’s the largest acquisition for Kroger in more than a decade , adding 219 stores in the Southeastern U.S. and $4.5 billion in new revenue to the company. Analysts praised the deal because it offers Kroger a platform for expanding into Florida or the Northeastern U.S. It also brings the company a potential new product. Harris Teeter’s “click and collect” lets shoppers order online and have their grocery bundle waiting for them in the store.

Beyond Harris Teeter, analyst Chuck Cerankosky thinks it is possible that Kroger will pursue smaller acquisitions in cities where it already competes. That includes Chicago, where Safeway Inc. sold 15 Dominick’s stores and closed 57 others late last year. Kroger was rumored to be interested in those stores, but never made a deal.

“The Dominick’s stores have actually closed down but that doesn’t mean they can’t be sold,” said Cerankosky, managing director for Northcoast Research in Cleveland. “I think it’s Kroger’s style to make sure they have enough financial assets to continue with the company’s planned organic growth as well as to take advantage of in-market opportunities.”

Kroger shares peaked at $43.85 in October, then fell back under $40 in December. IT closed Friday at $39.46. Analysts have price targets ranging from $44.50 to $53 on Kroger. Cerankosky has a “buy” rating on the stock and a 12-month price target of $45.

Kroger’s stock price will depend on the company’s execution, including how well it integrates Harris Teeter and whether it can continue to grow organically at the same time.

“It’s

going to be an execution issue for Kroger which I think they can do well,” said McCormick. The Bahl & Gaynor portfolio manager adds that Kroger, P&G and Macy’s all carry a side benefit for investors in that they pay dividends and have enough cash to grow distributions. As global economic uncertainties and concerns over Federal Reserve policies rise this year, dividend-paying stocks will be more attractive to investors.

“So, is there gas left in the tank? The answer is yes,” said McCormick. “The difference is, this year, the tank is in a Buick. Last year, the market was a Ferrari. This year, I’d rather be driving a Buick.”

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