With an average analyst rating of hold, Kroger Company is clearly not a favorite. But some of the best stock picks are contrarian in nature. With most analysts more focused on growth than on value, a mediocre analyst rating does not necessarily mean a stock is a bad investment. So what do we know about KR's valuation?
Over the last year, Kroger Company shares have moved 15.8% while trading between the prices of $40.18 and $62.78. At its current price of $48.78 per share, KR has a trailing price to earnings (P/E) ratio of 14.9 based on its 12 month trailing earnings per share of $3.27. The stock's forward P/E ratio is 11.7. In 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.
Kroger Company's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. We can solve this problem by dividing the trailing P/E ratio by the company's five year earnings growth estimate, which in this case gives us a 1.01 Price to Earnings Growth (PEG) ratio.
A PEG ratio between 0 and 1 indicates a potentially undervalued stock. This metric is useful because some companies have a low P/E ratio for a reason: there is no earnings growth potential in the stock. Other companies may have high P/E ratios, but may still be undervalued if they have very high expected earnings growth rates. The main caveat with the PEG ratio is that it relies on the company's earnings growth estimates, which are potentially subject to manipulation.
We can also compare the ratio of Kroger Company's price to its book value. A company's book value refers to its present liquidation value: what would be left if the company sold off all its assets and paid off all of its debts today. Importantly, the book value does not include intangible assets such as the value of its brand and the goodwill (if any) of its customers. KR has a book value of 3.6, with anything close or below one indicating a potentially undervalued company.
A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. Kroger Company's quick ratio is 0.179. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.
The final element of our analysis will touch on Kroger Company's capacity to generate cash for the benefit of its shareholders or for reinvesting in the business. For this, we look at the company's levered free cash flow, which is the sum of all incoming and outgoing cash flows, including the servicing of current debt and liabilities. Kroger Company has a free cash flow of $3,576,000,000.00, which it uses to pay its shareholders a 0.0212% dividend.
By most metrics, Kroger Company is an undervalued stock. So why are analysts giving it a low rating? It probably has to do with their perception of its limited growth potential, as represented by its elevated PEG ratio. For growth-oriented investors, KR is cheap for a reason. On the other hand, diehard value investors believe that if you wait long enough an undervalued stock will always reach a fair valuation. We will continue to monitor the stock to see which thesis prevails.