Stocks Supermarkets

Kroger Co Valuation – March 2019 #KR

Company Profile (excerpt from Reuters): The Kroger Co. (Kroger), incorporated on April 3, 1902, 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 February 3, 2018, it had operated approximately 3,900 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 February 3, 2018, Kroger operated, either directly or through its subsidiaries, 2,782 supermarkets under a range of local banner names, of which 2,268 had pharmacies and 1,489 had fuel centers. As of February 3, 2018, the Company offered ClickList and Harris Teeter ExpressLane, personalized, order online, pick up at the store services at 1,056 of its supermarkets. As of February 3, 2018, its supermarkets, on average, stocked over 15,000 private label items. Its corporate brand products are primarily produced and sold in three tiers. P$$T, Check This Out and Heritage Farm are the three brands. Its other brands include Simple Truth and Simple Truth Organic. As of February 3, 2018, it had operated 37 food production plants, which consisted of 17 dairies, 10 deli or bakery plants, five grocery product plants, two beverage plants, two meat plants and two cheese plants.

Downloadable PDF version of this valuation:

ModernGraham Valuation of KR – March 2019

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 $19,630,800,304 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 182.61% Pass
6. Moderate PEmg Ratio PEmg < 20 9.91 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.53 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 -3.48 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 $2.48
MG Growth Estimate 7.51%
MG Value $58.35
Opinion Undervalued
MG Grade B+
MG Value based on 3% Growth $35.98
MG Value based on 0% Growth $21.09
Market Implied Growth Rate 0.71%
Current Price $24.60
% of Intrinsic Value 42.16%

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 $1.65 in 2016 to an estimated $2.48 for 2020. This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.71% 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 $20.76. The company pays a dividend of $0.53 per share, for a yield of 2.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 9.91, which was below the industry average of 24.89, 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 $-24.17.

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

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$24.17
Graham Number $20.76
PEmg 9.91
Current Ratio 0.76
PB Ratio 2.53
Current Dividend $0.53
Dividend Yield 2.15%
Number of Consecutive Years of Dividend Growth 13

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Most Recent Balance Sheet Figures

Balance Sheet Information 1/1/2019
Total Current Assets $10,803,000,000
Total Current Liabilities $14,274,000,000
Long-Term Debt $12,072,000,000
Total Assets $38,118,000,000
Intangible Assets $4,345,000,000
Total Liabilities $30,283,000,000
Shares Outstanding (Diluted Average) 806,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.95
Jan2019 $3.76
Jan2018 $2.09
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.48
Jan2019 $2.61
Jan2018 $1.98
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

Recommended Reading:

Other ModernGraham posts about the company

Kroger Co Valuation – June 2018 $KR
10 Low PE Stock Picks for the Defensive Investor – August 2017
5 Undervalued Large Cap Stocks for Value Investors – August 2017
10 Best Stocks for Value Investors This Week – 7/22/17
Kroger Company Valuation – July 2017 $KR

Other ModernGraham posts about related companies

Supervalu Inc Valuation – September 2018 $SVU
Kroger Co Valuation – June 2018 $KR
Kroger Company Valuation – July 2017 $KR
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

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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