Our Thoughts / Company Profile: The Kroger Co. (KR) – June 2, 2023

Risk: Reference all statements regarding risk.

Sector: Domestic Retail / Grocery and Drug Operations – Domestic

Periodicity Consideration: 60 Days / 3 Years to Indefinite (Some Trade Thoughts, though Primary Consideration – LT)

Fundamentals: Business Operations: Supermarkets, Pharmacies and Fuel Centers across 35 states in the United States and Digital Retail Offerings; with delivery services available. Brand Products include Private Selection, The Kroger, Big K, Smart Way and Heritage Farm. Brands within it’s retail offerings include Simple Truth and Simple Truth Organic.

Financial Ratios: Growing EPS (3 Yrs Diluted TTM): Yes / $2.70 to $4.22
Profit Margins: 1.29%
Dividend Payout Ratio: 30.66%
Long Term Debt to Capital: 0.57
Insolvency Ratio (Debt to Equity): 1.125

FASTgraphs Context: Taking a look at KR FASTgraphs …

With examining FASTgraphs of any company, the primary thing to consider is that it’s not as simple as “stock in the green = undervalued and buy” or “Stock over the green = overvalued and sell”. That’d be a quick way to lose a lot of money. In actuality, FASTgraphs gives far more in depth look at the equity of any company in relation to what the market thinks about and how it has valued the business over time. Thus, we saw that the market thinks a great deal about the value of COST over time. Whereas with KR, the market tends to keep it at a lower valuation.

Why?

Profit margins is just one area that provides an answer. In the retail space, it’s generally harder to pull off higher margins. COST runs a profit margin of 2.58%, whereas KR has profit margins of 1.29%. That is one factor. When one considers a multitude of factors, the market … for it’s collective reasons … is willing to pay more multiples for COST, than for KR.

However … over time, going back to 2009 …

It’s quite easy to see there is a floor of valuation, that the market feels that KR is too far undervalued, and we are in that zone.

ESG Score: 21 or the 30^th percentile. Will specify in the future how we use this data.

Strategy Thesis: ST Trades, Valuation, Equity Income (Dividend)

Our Thoughts: The above is simply a ‘quicksheet’ The Duke uses for various companies with which he invests, or is considering; to give you a ‘look over our shoulder’ of our thoughts at a snapshot in time. It’s typical of the factors considered looking over any Equity instrument or Option. Reference all statements regarding risk.

For any short-term (ST) trades and accounts? I’m not interesting in going long yet for a ‘specific buy’, but I do have that sort of overall bias. That is, to ‘buy’. But with Earnings here in just a few days time? I’m not ‘really’ interested in any short-term trades with KR. Especially with non-index, single-name stocks like AAP jumping around to the tune of +/- 40% or so at earnings. There are a few options strategies I know of that KR is putting itself in position for? But it’s not quite there yet for the aforemention reason that earnings is in a few days time.

For valuations however, which would be somewhat longer term? Yeah, here I am interested. With a different periodicity than a short-term trade, I wouldn’t mind a purchase here. But I would lay it out a bit different than COST. Here, I’d be willing to purchase a ½ of any full sized valuation postion if a final trigger is met, to initiate the buy. I don’t see that trigger quite yet. But if I did see it, I woulnd’t buying for a valuation strat. But I would keep the size, at ½ of any full sized position.

For Equity Income (Dividend) accounts? For smaller accounts, a position could be initiated at these levels, as long as there is future capital to average the position at a lower cost basis in the future. For larger accounts? Given valuations, usually what I would do is selling cash puts to equate to the position if assigned in the -0.45 ∆ range on a 1:1 basis. But with the way the options market looks at the moment? I’d simply buy the shares I’d wish to purchase at these levels.

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