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Kroger Company Valuation – July 2017 $KR

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – March 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Kroger Company (KR) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Kroger Co. (Kroger) manufactures and processes food for sale in its supermarkets. The Company operates supermarkets, multi-department stores, jewelry stores and convenience stores throughout the United States. As of January 28, 2017, it had operated approximately 4,000 owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses and food production plants through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. As of January 28, 2017, Kroger operated, either directly or through its subsidiaries, 2,796 supermarkets under a range of local banner names, of which 2,255 had pharmacies and 1,445 had fuel centers. As of January 28, 2017, the Company offered ClickList and Harris Teeter ExpressLane, personalized, order online, pick up at the store services at 637 of its supermarkets. P$$T, Check This Out and Heritage Farm are the three brands. Its other brands include Simple Truth and Simple Truth Organic.

KR Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of KR – July 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $20,156,636,845 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.76 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 228.34% Pass
6. Moderate PEmg Ratio PEmg < 20 11.52 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.40 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.76 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $1.96
MG Growth Estimate 12.41%
MG Value $65.35
Opinion Undervalued
MG Grade B
MG Value based on 3% Growth $28.44
MG Value based on 0% Growth $16.67
Market Implied Growth Rate 1.51%
Current Price $22.60
% of Intrinsic Value 34.58%

Kroger Co qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only initially concerned with the  low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $1.07 in 2014 to an estimated $1.96 for 2018.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.51% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Kroger Co revealed the company was trading above its Graham Number of $18.2.  The company pays a dividend of $0.45 per share, for a yield of 2%  Its PEmg (price over earnings per share – ModernGraham) was 11.52, which was below the industry average of 36.19, which by some methods of valuation makes it one of the most undervalued stocks in its industry.  Finally, the company was trading above its Net Current Asset Value (NCAV) of $-21.75.

Kroger Co performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$21.75
Graham Number $18.20
PEmg 11.51
Current Ratio 0.76
PB Ratio 3.40
Current Dividend $0.45
Dividend Yield 1.99%
Number of Consecutive Years of Dividend Growth 11

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Most Recent Balance Sheet Figures

Balance Sheet Information 4/1/2017
Total Current Assets $9,538,000,000
Total Current Liabilities $12,515,000,000
Long-Term Debt $0
Total Assets $35,799,000,000
Intangible Assets $4,172,000,000
Total Liabilities $29,654,000,000
Shares Outstanding (Diluted Average) 925,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.03
Jan2017 $2.05
Jan2016 $2.06
Jan2015 $1.72
Jan2014 $1.45
Jan2013 $1.39
Jan2012 $0.51
Jan2011 $0.87
Jan2010 $0.06
Jan2009 $0.95
Jan2008 $0.85
Jan2007 $0.77
Jan2006 $0.66
Jan2005 -$0.07
Jan2004 $0.21
Jan2003 $0.76
Jan2002 $0.63
Jan2001 $0.52
Jan2000 $0.36
Dec1998 $0.15
Dec1997 $0.32

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.96
Jan2017 $1.86
Jan2016 $1.65
Jan2015 $1.36
Jan2014 $1.07
Jan2013 $0.84
Jan2012 $0.59
Jan2011 $0.66
Jan2010 $0.59
Jan2009 $0.78
Jan2008 $0.62
Jan2007 $0.50
Jan2006 $0.39
Jan2005 $0.30
Jan2004 $0.49
Jan2003 $0.58
Jan2002 $0.46

Recommended Reading:

Other ModernGraham posts about the company

Kroger Company Analysis – 2015 Update $KR
17 Companies in the Spotlight This Week – 7/19/14
Kroger Company Annual Valuation – 2014 $KR

Other ModernGraham posts about related companies

Supervalu Inc Valuation – Initial Coverage $SVU
SpartanNash Co Valuation – Initial Coverage $SPTN
Core-Mark Holding Company Inc Valuation – Initial Coverage $CORE
The Kroger Co Valuation – August 2016 $KR
Whole Foods Market Inc Valuation – May 2016 $WFM
Whole Foods Market Inc. Valuation – October 2015 Update $WFM
Kroger Company Analysis – 2015 Update $KR
Whole Foods Market Inc. Quarterly Valuation – May 2015 $WFM
Whole Foods Market Inc. Quarterly Valuation – February 2015 $WFM
Safeway Inc. Quarterly Valuation – December 2014 $SWY

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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