Food price inflation will continue through 2023 and be passed on to consumers, making grocery chain Kroger's a 'buy', Bank of America says

• Kroger shares hit an all-time high Friday after Bank of America upgraded the grocer to a buy rating.
• The bank raised its price objective by 23% as it sees elevated levels of grocery inflation to continue at least through the first half of 2023.

Food shoppers are absorbing higher prices and that should boost earnings at Kroger, Bank of America said Friday in boosting both its rating and price objective for shares of the grocery chain.

Kroger's stock price hit an all-time high of $62.78 following the rating upgrade from neutral, gaining as much as 4.8% Friday morning.

"We see significant drivers of [earnings per share] upside over the next 2-3 yrs as elevated food inflation does not show signs of waning soon," Bank of America analysts Robert Ohmes and Kendall Toscano wrote in a research note.

The investment bank lifted its price objective by 23% to $75 from $61 as it now sees Kroger trading at 18 times its per-share earnings estimate of $4.10 for fiscal 2024. A Bloomberg consensus estimate for earnings for that period was $3.96.

Persistent food inflation and higher grocery prices being passed through to consumers are factors that should contribute to earnings strength at Kroger, the bank said.

"We see US consumers accepting the bulk of price increases given US average hourly earnings up +6% y/y," said the BofA analysts. Ticket inflation for supermarkets has increased more than 8% since mid-February while grocery promotions are running below historical norms despite some improvements in the availability of supply.

Bank of America ran a pricing study in Las Vegas in March and found Kroger's prices have risen by 7% compared with 2019. Kroger remained competitive with Walmart's prices "at just a +4% premium," the analysts said.

BofA's view of Kroger's business prospects arrived as annual US consumer price inflation ran at a 40-year high of 7.9%. The Federal Reserve has launched what's shaping up to be an aggressive campaign to pull down inflation.

"If these high levels of inflation get entrenched in our economy and in people's thinking, then inevitably that will lead to much tighter monetary policy," Federal Reserve Chairman Jerome Powell said in January in testimony on Capitol Hill.

The Fed last month began raising interest rates by 25 basis points and officials have signaled they are preparing to hike rates by 50 basis points at upcoming meetings. At least six more rate hikes may be in the pipeline, officials signaled.