What is KR's Intrinsic value?

Kroger Co (KR) Intrinsic Value Analysis

Executive Summary

As of May 31, 2025, Kroger Co's estimated intrinsic value ranges from $57.83 to $106.71 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $101.39 +48.6%
Discounted Cash Flow (5Y) $84.61 +24.0%
Dividend Discount Model (Multi-Stage) $62.27 -8.7%
Dividend Discount Model (Stable) $57.83 -15.2%
Earnings Power Value $106.71 +56.4%

Is Kroger Co (KR) undervalued or overvalued?

With the current market price at $68.23, the stock appears to be significantly undervalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate Kroger Co's intrinsic value, including:

  1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
  2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments
  3. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.9% 4.4%
Equity market risk premium 4.6% 5.6%
Adjusted beta 0.49 0.58
Cost of equity 6.1% 8.1%
Cost of debt 4.0% 4.5%
Tax rate 21.5% 22.8%
Debt/Equity ratio 0.39 0.39
After-tax WACC 5.3% 6.8%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

  • Forecast Period: 5-year DCF and 10-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 6.0% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $147,123 (FY02-2025) to $245,898 (FY02-2035)
  • Net profit margin expansion from 2% to 2%
  • Capital expenditures maintained at approximately 2% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $85 $69,863M 78.5%
10-Year Growth $101 $80,955M 64.0%
5-Year EBITDA $81 $67,741M 77.9%
10-Year EBITDA $98 $78,701M 62.9%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 33.1%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 7.1%
  • Long-term growth rate: 1.0%
  • Fair value: $62.27 (-8.7% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 8.1% (Low) to 6.1% (High)
  • Long-term growth rate: 0.5% (Low) to 1.5% (High)
  • Fair value range: $37 to $79
  • Selected fair value: $57.83 (-15.2% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $5,020M
Discount Rate (WACC) 6.8% - 5.3%
Enterprise Value $73,740M - $95,196M
Net Debt $13,946M
Equity Value $59,794M - $81,250M
Outstanding Shares 661M
Fair Value $90 - $123
Selected Fair Value $106.71

Key Financial Metrics

Metric Value
Market Capitalization $45093M
Enterprise Value $59039M
Trailing P/E 16.92
Forward P/E 16.61
Trailing EV/EBITDA 7.95
Current Dividend Yield 194.79%
Dividend Growth Rate (5Y) 13.40%
Debt-to-Equity Ratio 0.39

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Discounted Cash Flow (10Y) 30% $30.42
Discounted Cash Flow (5Y) 25% $21.15
Dividend Discount Model (Multi-Stage) 20% $12.45
Dividend Discount Model (Stable) 15% $8.67
Earnings Power Value 10% $10.67
Weighted Average 100% $83.37

Investment Conclusion

Based on our comprehensive valuation analysis, Kroger Co's weighted average intrinsic value is $83.37, which is approximately 22.2% above the current market price of $68.23.

Key investment considerations:

  • Strong projected earnings growth (2% to 2% margin)
  • Consistent cash flow generation
  • Historical dividend growth of 13.40%

Given these factors, we believe Kroger Co is currently significantly undervalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.