Kroger Company Annual Valuation – 2014 $KR

174px-Kroger_logo.svgBenjamin 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 5 Undervalued Companies for the Enterprising Investor Near 52 Week Lows.  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 specific look at how Kroger Company (KR) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Kroger Co. is a retailer in the United States. The Company also manufactures and processes some of the food for sale in its supermarkets. As of January 28, 2012, the Company operated, either directly or through its subsidiaries, 2,435 supermarkets and multi-department stores, 1,090 of which had fuel centers. Approximately 45% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. As of January 28, 2012, the Company operated 2,435 supermarket and multi-department stores under banners, including Kroger, City Market, Dillons, Jay C, Food 4 Less, Fred Meyer, Fry’s, King Soopers, QFC, Ralphs and Smith’s. Of these stores, 1,090 have fuel centers. In January 2014, The Kroger Co and Harris Teeter Supermarkets, Inc announced the completion of the merger transaction between the two companies. In February 2014, the Company purchased the assets of YOU Technology Brand Services, Inc.
KR Chart

KR data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $49.35
MG Value $102.38
MG Opinion Undervalued
Value Based on 3% Growth $38.56
Value Based on 0% Growth $22.60
Market Implied Growth Rate 5.03%
Net Current Asset Value (NCAV) -$31.09
PEmg 18.56
Current Ratio 0.77
PB Ratio 5.28

Balance Sheet – 4/30/2014

Current Assets $8,368,000,000
Current Liabilities $10,924,000,000
Total Debt $9,664,000,000
Total Assets $28,913,000,000
Intangible Assets $2,833,000,000
Total Liabilities $24,164,000,000
Outstanding Shares 508,000,000

Earnings Per Share

2015 (estimate) $3.21
2014 $2.92
2013 $2.79
2012 $1.02
2011 $1.75
2010 $0.11
2009 $1.90
2008 $1.69
2007 $1.54
2006 $1.32
2005 -$0.14

Earnings Per Share – ModernGraham

2015 (estimate) $2.66
2014 $2.16
2013 $1.69
2012 $1.19
2011 $1.32
2010 $1.17

Dividend History

KR Dividend Chart

KR Dividend data by YCharts

Conclusion:

Kroger Company is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor has concerns with the low current ratio and the high PB ratio while the Enterprising Investor is concerned with the high level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Whole Foods Market (WFM).  From a valuation standpoint, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.32 in 2011 to an estimated $2.66 for 2015. This level of demonstrated growth is greater than the market’s implied estimate of 5.03% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above than the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Kroger Company (KR)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Kroger Company (KR) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia or the company website for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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