The pop in Kroger (KR) shares today isn’t sustainable. The stock is up on a Wall Street analyst report arguing that the company’s "Venture Concepts could ultimately unlock $4 to $12/share value for Kroger."
However, much like the risks embedded in Kroger’s exposure to underfunded pension plans, buying the supermarket chain’s shares up here could unwind quickly and unexpectedly.
Hedgeye Consumer Staples analyst Howard Penney has been warning about risks embedded in Kroger shares. A principle concern is Kroger’s exposure to a large number of multi-employer pension plans that the company keeps intentionally underfunded.
Kroger is one of the largest unionized employers in the United States. About 375,000 of their employees are covered by roughly 300 collective bargaining agreements. Kroger employees participate in 36 multi-employer pension plans (MPP), with a combined $70 billion in assets and $100 billion in associated liabilities.
“Kroger’s management team and industry analysts continue to ignore and understate the risks that multi-employer pension plans (MPPs) present to Kroger’s future growth prospects,” Penney wrote in a recent institutional research note.
That’s a big problem. Here’s what you need to know:
- Underfunded: A Segal Consulting survey found that 53% of the retail food MPPs surveyed were in the “red zone,” meaning they had either “immediate and significant funding problems” or would be unable “to pay benefits within 15 to 20 years.”
- Risky In Financial Market Downturn: Milliman data shows that every 4% decline in asset returns pushes MPP funding status down by 15% to 20%.
- Problem Is Getting Bigger: In 2015, Kroger’s pension liability ballooned 61% to $2.9 billion. That number will go even higher this year, hindering the company’s ability to grow and likely leading to lower equity value.
Bottom Line: Kroger’s problems run deep. Sell.
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Want to read more? Click here to check out Penney’s Investopedia article on Kroger.