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The Kroger Co Valuation – August 2016 $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 – August 2016.  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 The Kroger Co (KR) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Kroger Co. (Kroger) operates retail food and drug stores, multi-department stores, jewelry stores and convenience stores across the United States. The Company also manufactures and processes food for sale in its supermarkets. It operates through retail operations segment. The Company operates, either directly or through its subsidiaries, approximately 2,778 retail food stores under a range of local banner names, approximately 1,387 of which have fuel centers. The Company’s supermarkets are operated under combination food and drug stores (combo stores), multi-department stores, marketplace stores or price impact warehouses. The Company’s corporate brand products are primarily produced and sold in approximately three tiers. Private Selection is the brand designed to beat the gourmet or upscale brands. The banner brand includes Kroger, Ralphs, Fred Meyer and King Soopers. The Company’s other brands also include Simple Truth and Simple Truth Organic.

KR Chart

KR data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of KR – August 2016

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 $31,802,349,926 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.70 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 220.33% Pass
6. Moderate PEmg Ratio PEmg < 20 17.34 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.94 Fail
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 0.70 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

KR value chart August 2016

EPSmg $1.89
MG Growth Estimate 15.00%
MG Value $72.73
Opinion Undervalued
MG Grade C-
MG Value based on 3% Growth $27.39
MG Value based on 0% Growth $16.06
Market Implied Growth Rate 4.42%
Current Price $32.76
% of Intrinsic Value 45.05%

The Kroger Co does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PB 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 explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $0.84 in 2013 to an estimated $1.89 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.42% 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 The Kroger Co revealed the company was trading above its Graham Number of $17.86. The company pays a dividend of $0.41 per share, for a yield of 1.2% Its PEmg (price over earnings per share – ModernGraham) was 17.34, which was below the industry average of 20.45, 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 $-18.82.

The Kroger Co receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

KR charts August 2016

Net Current Asset Value (NCAV) -$18.82
Graham Number $17.86
PEmg 17.34
Current Ratio 0.70
PB Ratio 4.94
Current Dividend $0.41
Dividend Yield 1.25%
Number of Consecutive Years of Dividend Growth 11

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Useful Links:

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GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 4/1/2016
Total Current Assets $9,216,000,000
Total Current Liabilities $13,145,000,000
Long-Term Debt $0
Total Assets $33,801,000,000
Intangible Assets $3,787,000,000
Total Liabilities $27,395,000,000
Shares Outstanding (Diluted Average) 966,000,000

Earnings Per Share History

Next Fiscal Year Estimate $2.13
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
Dec1996 $0.34

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.89
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
Jan2001 $0.36

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

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
Whole Foods Markets Inc. Quarterly Valuation – October 2014 $WFM
Whole Foods Market Inc. Quarterly Valuation – July 2014 $WFM
Kroger Company Annual Valuation – 2014 $KR
Whole Foods Market Inc. (WFM) Quarterly Valuation – April 2014

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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