Kroger Company has an average analyst rating of only hold, but it may be attractive to value minded investors. let's take a closer look at the numbers and see why the stock doesn't garner more enthusiasm.
Kroger's P/E and P/B Ratios are Lower Than the Sector Averages
Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Kroger Company is 3.6, compared to its sector average of 4.09 and the S&P 500's average P/B of 2.95.
The most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 48.31 divided by either its trailing or forward earnings, which for Kroger Company are $3.27 and $4.17 respectively. Based on these values, the company's trailing P/E ratio is 14.8 and its forward P/E ratio is 11.6. By way of comparison, the average P/E ratio of the Consumer Defensive sector is 24.21 and the average P/E ratio of the S&P 500 is 15.97.
The Company Is Fairly valued in Terms of Estimated Growth
The problem with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has extremely high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value if its projected earnings are stagnant.
When we divide Kroger Company's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 1.01. A PEG ratio of 1 or less may indicate the company is undervalued in terms of its growth potential. On the other hand, a PEG ratio higher than 1 could indicate that investors are paying too high a premium for these growth levels. Bear in mind, however, that the 5 year earnings growth estimate could very well be an over or underestimate!
KR Has Mounting Liabilities But Strong Cash Flows
Indebted or mismanaged companies can't sustain shareholder value for long, even if they have strong earnings. For this reason, considering Kroger Company's ability to meet its debt obligations is an important aspect of its valuation. By adding up its current assets, then subtracting its inventory and prepaid expenses, and then dividing the whole by its current liabilities, we obtain the company's Quick Ratio of 0.179. Since KR's is lower than 1, it does not have the liquidity necessary to meet its current liabilities.
One last metric to check out is Kroger Company's free cash flow of $3,576,000,000.00. This represents the total sum of all the company's inflows and outflows of capital, including the costs of servicing its debt. It's the final bottom line of the company, which it can use to re-invest or to pay its investors a dividend. With such healthy cash flows, investors can expect Kroger Company to keep paying its 1.8% dividend.
In conclusion, Kroger Company may hold more intrinsic value than analysts give it credit for. We will keep following KR to see whether the value or growth thesis prevails.