SUPERMARKET STOCKS CALLED UNDERVALUED

GREG GATTUSO

NEW YORK -- Wall Street has failed to recognize individual food retailing companies as good investment opportunities and instead has bought into myths that food retailers are boring, suffering from low inflation and operating in an overstored landscape.

As a result, food retailers' stocks are unfairly lumped together by investors -- and also lumped together incorrectly with nonfood retailers, said George Thompson, senior analyst at Prudential Securities here.

Speaking at the New York Society of Security Analysts Retail Industry Conference here, Thompson said supermarket stocks have been undervalued for a long time -- due largely to insignificant food retailing stock averages.

"Food retailers have more in common with consumer staples companies than with retailers like Victoria's Secret or Home Depot," he said. "When you look at a Kroger or an Albertson's, they are building a brand franchise, similar to Coca-Cola."

Among supermarket companies, "Group averages are meaningless and they will become more so because of the disparity in performance,"

Thompson said. "[Food retailers] are market-share stories with at least as much in common with consumer staple stocks as a with retailing names. We should be spending less time comparing the fundamentals and financials with the group averages and more time putting them up against market averages."

Thompson said investors should use S&P 500 benchmarks to judge food retailers' performance. For example, Albertson's 1996 return on average assets of 11.2% beat the S&P average of 8% to 9%. Some other S&P averages are: unit volume growth, 2% to 3%; sales growth, 3% to 5%; and earnings per share growth, 8% to 10%.

Stacking supermarket stocks against the S&P averages can help identify the two types of supermarket stocks preferred by Thompson: strong performers and "fallen angels."

"With strong performers, you buy them and hope they stay strong. With fallen angels, you hope they rise again," he said.

Thompson also countered the feeling that low food inflation is unilaterally bad for food retailers.

"The lack of inflation isn't a bad thing, as long as you're the cause," he said. "If Kroger gets better margins and gives some of the savings back to the consumer, that drives the top line, and it's a good thing. Many food retailers are actually creating the deflation."

He said deflation has come from supermarkets' improved efficieny in distribution, and the increasing strength they have in dealing with vendors -- a strength that stems from their own burgeoning private-label programs.

Thompson said the strongest supermarket chains are adding capacity to higher-margin perimeter departments.