Get Ahold of This (OTC: AHONY)

Supermarket blurry image

Koninklijke Ahold NV (Ahold) (ticker: AHONY) is a 130-year-old Netherlands-based retail group with supermarkets comprising the majority of its revenues. Ahold’s retail operations are divided into three geographical segments: U.S. (60% of revenue), including Stop & Shop, Giant, and Peapod; the Netherlands (35%); and other European nations (4%).
Ahold’s sustainability priorities include CO2 reduction, zero waste to landfill, social compliance, critical commodities, employee well-being, and transparent reporting. In 2010, Ahold set a series of five-year targets, including mapping the environmental footprint of 50% of store brand suppliers and their supply chains, raising the proportion of healthier products to 25% of total food sales, and 100% sourcing of six critical commodities for its store brand products in accordance with industry certification standards. In 2015, Ahold reduced the carbon footprint of its operations by nearly 26% from 2008 levels. And as part of its 2020 goal of diverting zero waste to landfills, Ahold established an anaerobic digester system in the U.S. to turn food waste into energy.
AHONY stock chart 5.26.16
In 2011, Peapod (a U.S.-based home delivery grocery company acquired by Ahold in 2001) launched the first virtual grocery stores in the U.S., with pickups at commuter rail stations in Chicago and along the East Coast. While online sales currently comprise a small portion of revenue (~5%), Ahold is investing more in this area.
In 2015, Albert Heijn opened its first organic store in Utrecht, bumping organic products up to 3% of total 2015 sales. The Albert Heijn store brand organic products go back to 1998.
This summer’s merger with DelHaize (DEG), which owns Food Lion and Hannaford Bros. supermarkets, presents the well-managed Ahold with an opportunity to take over the assets of a poorly managed company. The combined firm will become America’s fourth largest grocery seller, with exposure to one-third of the U.S. population. The company anticipates cost savings of $560 million per year to be fully realized in three years post-merger.
Ahold is a well-run, steady business with good labor relations and a solid sustainability record. It has a decent dividend yield and lower risk, which we are looking for in this stage of the market cycle. While like other food retailers the company operates on very thin margins, it has a track record of generating more cash than it needs for operations on a day-to-day basis. Additionally, post-merger, there is upside potential with improved management. We believe AHONY is a modestly undervalued stock with a current price target of $22.30.
Koninklijke Ahold NV
Revenues: $41.38 billion
2016 PE ratio: 18.49
Projected Earnings Growth: 7.9%
Dividend Yield: 2.67%
Stock 52-week Low–High: $17.84–$23.07
Risk: Low