For the 52 weeks through Sept. 7, The Kroger Co. (KR, Financial) has climbed 52% on the New York Stock Exchange to a share price of $32.40. Following the growth, the share price is above the 52-day simple moving average and far beyond the 200- and 100-day simple moving average lines.
The share price of the U.S. operators of grocery stores is also 64.4% above its 52-week low of $19.69 and is only 1.1% below its 52-week high of $32.74.
Even though it is not trading at its cheapest, Kroger stock is not expensive. The price-earnings ratio is 7.82 versus an industry median of 18.85, and the price-sales ratio is 0.23 versus an industry median of 0.48. Value investors usually take into consideration thresholds of 15 for the first ratio and of 1.5 for the second ratio.
Kroger is also showing some signs of attractiveness. With an earnings yield of 12.8%, Kroger is 876 basis points ahead of the monthly average spot rate on bonds representing 10-year maturity corporate loans in triple-A, double-A and single-A rated companies. The gap is also immense for one-year U.S. Treasury bills, which are granting 2.49%.
Regardless of the appeal of its earnings yield, wait for a significant drop before acquiring shares of Kroger.
First, the 14-day relative strength index of 65.6 is suggesting that the margin for stock appreciation, which is still available down the road, is not increasing even though the share price is still far from overbought levels.
Second, Wall Street is indicating a target price of $30.68 per share, which is below the current market valuation.
Third, the U.S. retailer has a forward price-earnings ratio of 16.08 that, when multiplied by a predicted earnings per share of $2.16, yields a value of $34.73. The result is only 7.2% higher than the current market valuation. In addition, the price-book ratio is 3.77, versus an industry median of 1.73.
Kroger is likely to raise its guidance on net earnings as the company continues to progress with its store optimization program. However, current valuations are offering insufficient upside to justify a buying approach. Therefore, analysts suggesting not to go beyond a hold approach with Kroger at the moment are correct.
According to GuruFocus, Kroger's business is lying on a good financial basis. The financial strength rating is 6 out of 10.
The company is distributing a cash quarterly dividend of 14 cents that, if held constant, leads to a forward dividend of 52 cents, granting a 1.72% yield. The current dividend yield of the S&P 500 index is 1.78%, indicating that, amid the index, you can find better stocks.
Disclosure: I have no positions in any security mentioned in this article.
