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The Kroger Co Stock Shows Every Sign Of Being Modestly Overvalued

·4 min read

- By GF Value

The stock of The Kroger Co (NYSE:KR, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $38.61 per share and the market cap of $29.2 billion, The Kroger Co stock shows every sign of being modestly overvalued. GF Value for The Kroger Co is shown in the chart below.


The Kroger Co Stock Shows Every Sign Of Being Modestly Overvalued
The Kroger Co Stock Shows Every Sign Of Being Modestly Overvalued

Because The Kroger Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 7.6% over the past three years and is estimated to grow 1.31% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. The Kroger Co has a cash-to-debt ratio of 0.14, which ranks worse than 76% of the companies in the industry of Retail - Defensive. Based on this, GuruFocus ranks The Kroger Co's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of The Kroger Co over the past years:

The Kroger Co Stock Shows Every Sign Of Being Modestly Overvalued
The Kroger Co Stock Shows Every Sign Of Being Modestly Overvalued

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. The Kroger Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $132.5 billion and earnings of $3.25 a share. Its operating margin is 2.10%, which ranks in the middle range of the companies in the industry of Retail - Defensive. Overall, GuruFocus ranks the profitability of The Kroger Co at 8 out of 10, which indicates strong profitability. This is the revenue and net income of The Kroger Co over the past years:

The Kroger Co Stock Shows Every Sign Of Being Modestly Overvalued
The Kroger Co Stock Shows Every Sign Of Being Modestly Overvalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of The Kroger Co is 7.6%, which ranks better than 71% of the companies in the industry of Retail - Defensive. The 3-year average EBITDA growth rate is 23.1%, which ranks better than 73% of the companies in the industry of Retail - Defensive.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, The Kroger Co's return on invested capital is 5.08, and its cost of capital is 2.41. The historical ROIC vs WACC comparison of The Kroger Co is shown below:

The Kroger Co Stock Shows Every Sign Of Being Modestly Overvalued
The Kroger Co Stock Shows Every Sign Of Being Modestly Overvalued

To conclude, The stock of The Kroger Co (NYSE:KR, 30-year Financials) appears to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 73% of the companies in the industry of Retail - Defensive. To learn more about The Kroger Co stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.