Kroger (KR)

By June 23, 2016 No Comments

In today’s content analysis, we talk about Kroger (KR), one of the world’s largest grocery retailers, with TTM sales of more than $110 billion. Kroger’s Q1 results were updated last Thursday in StockPointer.  Download

For the first time since July ’14, the intrinsic value is higher than the stock’s price, a very bullish signal when considering that this was caused by the intrinsic value jump. This IV growth can be explained by the remarkable NOPAT growth over the last 12 months. The NOPAT did grow by about 12% every single year over the past 5 years, but the growth rate of 17% was much higher in the last 12 months. The return on capital of 10.4% is the highest observed over the last 5 years.

As for valuation, the current P/IV ratio indicates a 10% potential upside, but since the stock always traded above its intrinsic value over the past 2 years, it could very well happen again if the stock can get back the momentum it had in late 2015. Given the 17% NOPAT growth in the last 12 months, the 13.7% premium for future growth (FGV) is seems reasonable.

Kroger’s EVA also jumped in the last quarter, and is now at a 5 year high. Also note that the P/E ratio of 15.8 is very reasonable compared to the S&P500 average P/E of 24 and to the Groceries average P/E of 22.6.

Kroger has been able to increase its revenues at an average growth rate of 5% per year over the past 5 years. The dividend growth has been much higher, at 17% per year. Even with this aggressive growth rate, the payout ratio is very conservative at 19%. Kroger also constantly generates positive free cash flows, and they’re also at a 5 year high. The company should thus be able to sustain a high dividend growth rate as well as the share buybacks it’s been doing over the past 5 years.