Financial Services Stocks

KKR & Co Ltd Valuation – March 2017 $KKR

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 KKR & Co Ltd (KKR) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): KKR & CO. L.P. (KKR) is a global investment firm that manages investments across multiple asset classes, including private equity, energy, infrastructure, real estate, credit and hedge funds. The Company’s business offers a range of investment management services to its fund investors, and provides capital markets services to its firm, its portfolio companies and third parties. The Company conducts its business with offices across the world, providing it with a global platform for sourcing transactions, raising capital and carrying out capital markets activities. The Company operates through four segments: Private Markets, Public Markets, Capital Markets and Principal Activities. It operates and reports its combined credit and hedge funds businesses through the Public Markets segment. The Capital Markets segment consists primarily of its global capital markets business. Through its Principal Activities segment, the Company manages the firm’s assets and deploys capital.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of KKR – March 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 all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $14,889,756,354 Pass
2. Earnings Stability Positive EPS for 10 years prior Fail
3. Dividend Record Dividend Payments for 10 years prior Fail
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 103.70% Pass
5. Moderate PEmg Ratio PEmg < 20 14.81 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.49 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

EPSmg $1.23
MG Growth Estimate -3.24%
MG Value $2.49
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $17.89
MG Value based on 0% Growth $10.49
Market Implied Growth Rate 3.15%
Current Price $18.27
% of Intrinsic Value 733.06%

KKR & Co. L.P. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the poor dividend history. The Enterprising Investor has concerns regarding the lack of earnings growth over the last five years. 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 Overvalued after seeing its EPSmg (normalized earnings) decline from $1.57 in 2013 to an estimated $1.23 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 3.15% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into KKR & Co. L.P. revealed the company was trading below its Graham Number of $22.48. The company pays a dividend of $0.64 per share, for a yield of 3.5%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 14.81, which was below the industry average of 21.33, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

KKR & Co. L.P. receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Graham Number $22.48
PEmg 14.81
PB Ratio 1.49
Dividend Yield 3.50%
TTM Dividend $0.64
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Long-Term Debt & Capital Lease Obligation $18,544,075,000
Total Assets $39,002,897,000
Intangible Assets $0
Total Liabilities $33,063,064,000
Shares Outstanding (Diluted Average) 483,431,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.70
Dec2016 $0.59
Dec2015 $1.01
Dec2014 $1.16
Dec2013 $2.30
Dec2012 $2.21
Dec2011 $0.01
Dec2010 $1.62

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.23
Dec2016 $1.15
Dec2015 $1.40
Dec2014 $1.55
Dec2013 $1.57
Dec2012 $1.06
Dec2011 $0.44
Dec2010 $0.54

Recommended Reading:

Other ModernGraham posts about the company

KKR & Co L.P. Valuation – August 2016 $KKR
10 Best Dividend Paying Stocks for the Enterprising Investor – August 2016
Dividend Investors Should Research These 10 Stocks – July 2016
10 Most Undervalued Companies for the Enterprising Investor – June 2016
10 Companies for Enterprising Dividend Investors – June 2016

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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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