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Kroger Looks Undervalued After Pullback

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- By Nicholas Kitonyi

Shares of The Kroger Co. (NYSE:KR) are down more than 14% since the start of September. The company's most recent earnings report, which was released earlier this month, failed to trigger a rebound, instead subjecting the stock to more declines.

The stock has since plummeted to trade at a trailing price-earnings ratio of about 8.41, which is significantly below the Peter Lynch fair valuation multiple of 15. This suggests that shares of the company could be undervalued based on earnings from the previous four quarters.

Kroger is America's second-largest general retailer by revenue behind Walmart Inc. (NYSE:WMT), but its market value is several levels lower in that list. This could be another signal for potential undervaluation. However, its top and bottom line performances have not been steady over the past several years.

A look at the numbers

The grocery store chain's revenue topped $123.3 billion in 2018, but fell to $121.9 billion a year later. In fiscal 2020, which ended Jan. 31, the top line bounced back to $122.3 billion. But based on the trailing 12-month revenue, the company's revenue now appears to be on course to breach the $130 billion mark. Revenue from the first three quarters of fiscal 2021 currently stand at $103 billion.

Looking at the bottom line, Kroger's net income for the nine-month period now stand at around $2.66 billion, which is already more than last year's total of $1.65 billion. It has also surpassed the 2018 bottom line of $1.91 billion and is now on course to top $2.9 billion for 2021.

Kroger has guided for earnings per share of $3.30 to $3.35 for the full year, which based on the current price of about $31.40 per share equates to a price-earnings ratio of about 9.44. This suggests that unless the price rises dramatically between now and the time when fourth-quarter results are announced, shares of Kroger will still be substantially undervalued.

However, the company's forward price-earnings ratio of about 11.68 suggest that earnings could fall slightly in the next fiscal year. But this is still below the 15 threshold, which again suggests there will be room left to run.


In summary, shares of Kroger appear to be potentially undervalued based on the Peter Lynch earnings line. Its price-earnings ratio of 8.41 is also lower than Walmart's equivalent of 20.96.

The forward price-earnings ratio of 11.68 and the PEG ratio of 1.96, which includes projected earnings for the next five years, are also massively lower than Walmart's multiples of 25.25 and 3.95.

Disclosure: No positions in the stocks mentioned.

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This article first appeared on GuruFocus.