KR Market Research & Analysis Report
Updated Dec 22, 2015

Growth and Balance Sheet

Kroger Co., (KR) reported third-quarter profit that topped analysts’ estimates and raised its annual forecast after new locations and organic products fueled sales. Net income rose 18 percent to $428 million, or 43 cents a share, Cincinnati-based Kroger said in a statement on Thursday. Analysts estimated 39 cents, on average. The results help validate Kroger’s expansion plan, which involves acquiring smaller grocery chains and adding more organic products. Last month, Kroger agreed to buy Midwestern supermarket chain Roundy’s Inc. for about $800 million, including debt. It previously bought other regional stores and scooped up Harris Teeter Supermarkets Inc. last year. Kroger’s revenue also has been helped by a more aggressive natural-foods business. The company said profit will be as much as $2.04 a share this fiscal year, excluding some items. Kroger previously estimated as much as $1.98 a share, and analysts project $1.99, on average. Comparable-store sales, excluding fuel, increased 5.4 percent in the quarter ended Nov. 7. Analysts estimated a gain of 4.5 percent. Kroger’s Simple Truth line of natural and organic goods has grown to more than $1 billion in annual sales as more Americans attempt to eat healthier. The chain has had success pulling customers from pricier, higher-end chains, such as Whole Foods Market Inc., with its organic cereals, butter and herbs. Kroger’s third-quarter revenue climbed 0.4 percent to $25.1 billion. Analysts projected $25.2 billion, on average. Lower fuel prices weighed on sales in the quarter, the company said.

Valuation

Kroger Co., (KR) P/E stands at 20.66 below the industry average of 20.94, and above the S&P 500 average of 17.45 The company is currently trading above the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 12.40x to 20.70 trailing 12-month earnings. KR's current Price/Sales of 0.37 is below the average of its industry of 0.56. KR’s head to head comparison to its main competitors shows that the company has gross margin below the peer average, and one that is below the industry average. The achieved operating margin of the company is below the average operating margin of the selected competitors, and it is below the industry average. The quarterly revenue is above the industry average and below its main competitors. The stock is currently trading below its intrinsic value of $44.30 this suggests that the stock is undervalued at these levels. The beta of 1.10 implies higher volatility of the stock with respect to the S&P 500. KR has shown positive earnings consistency over the last five years. Company’s earnings have increased by 100.93% over the same period. The current quarter earnings in comparison to the same quarter last year are -16.22%. KR’s Total Debt/Equity of 179.56 is negative. KR’s current price levels are below the maximum level, is trading 3.3% below the 52 week high of $42.58, and the technical analysis give a bullish view of the stock. The majority of analyst ratings are bullish. KR dividend yield stands at 0.10% with payout ratio at 18.83%. 

About KR

The Kroger Co. operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States. The Company also manufactures and processes some of the food for sale in its supermarkets. The Company operated, either directly or through its subsidiaries, approximately 2,640 supermarkets and multi-department stores, approximately 1,240 of which had fuel centers. Approximately 45% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. The Company operates its 2,640 supermarket and multi-department stores under banners, including Kroger, City Market, Dillons, Jay C, Food 4 Less, Fred Meyer, Fry’s, Harris Teeter, King Soopers, QFC, Ralphs and Smith’s.

Competitor Comparison

The Kroger Co. (NYSE: KR) N.V.

Highlights

As of January 31, 2015, the Company operated through subsidiaries 782 convenience stores, 326 fine jewelry stores and an online retailer. All 132 of its fine jewelry stores located in malls are operated in leased locations. In addition, 78 convenience stores were operated by franchisees through franchise agreements. Approximately 54% of the convenience stores operated by subsidiaries were operated in Company-owned facilities. The convenience stores offer a limited assortment of staple food items and general merchandise and sell gasoline. The stock closed yesterday’s trading session at $41.21. In the past year, the stock has hit a 52-week low of $27.32 and 52-week high of $42.58. KR has a market cap of $40.69 billion and is part of the services sector.

• Large and established presence   
• Effective differentiation measures
• Presence in several formats increases addressable market     

• High indebtedness
• Strong competition

KR Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. KR's 52 week high is $42.58 current price is 41.21, is 3.3% below the 52 week high. 

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 20.66 at the average industry P/E ratio of 20.94 and is above the S&P 500 P/E ratio of 17.45. 

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 0.78% of KR stock. Management's representation is not large enough. This does satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

KR is trading in the range of $36.00 - $42.58 in the past 30 days. The stock has been showing support at $39.20 and resistance in the $42.40 range. The stock is trading above the 50-Day Moving Average and above the 200-Day Moving Average. The RSI(14) is 63.64. Our indicators give a bullish view on KR. 

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 12 Buy, 5 Outperform, 8 Hold, 0 Underperform and 0 Sell.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. KR’s annual EPS for the last 5 years were 0.87, 0.50, 1.38, 1.45, 1.74 this type of earnings action is positive. 

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 25% or should be less than the average Debt/Equity for its industry. KR’s have total debt/equity ratio of 179.56 which is negative.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. KR’s EPS growth for this quarter relative to the same quarter a year earlier is -16.22, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. KR’s annual earnings growth rate over the past five years is 100.93%, above the target growth rate.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.