Critical Comparison: The Kroger Co. (KR) vs. New Media Investment Group Inc. (NEWM)

The Kroger Co. (NYSE:KR) shares are down more than -15.09% this year and recently decreased -2.30% or -$0.55 to settle at $23.35. New Media Investment Group Inc. (NYSE:NEWM), on the other hand, is down -23.85% year to date as of 08/08/2019. It currently trades at $8.81 and has returned -17.20% during the past week.

The Kroger Co. (NYSE:KR) and New Media Investment Group Inc. (NYSE:NEWM) are the two most active stocks in the Grocery Stores industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect KR to grow earnings at a 5.82% annual rate over the next 5 years.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 7.93% for New Media Investment Group Inc. (NEWM). KR’s ROI is 15.10% while NEWM has a ROI of 4.40%. The interpretation is that KR’s business generates a higher return on investment than NEWM’s.

Cash Flow

The value of a stock is simply the present value of its future free cash flows. KR’s free cash flow (“FCF”) per share for the trailing twelve months was +1.60. Comparatively, NEWM’s free cash flow per share was +0.10. On a percent-of-sales basis, KR’s free cash flow was 1.05% while NEWM converted 0.4% of its revenues into cash flow. This means that, for a given level of sales, KR is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. KR has a current ratio of 0.70 compared to 1.00 for NEWM. This means that NEWM can more easily cover its most immediate liabilities over the next twelve months. KR’s debt-to-equity ratio is 1.57 versus a D/E of 0.65 for NEWM. KR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

KR trades at a forward P/E of 10.09, a P/B of 2.17, and a P/S of 0.15, compared to a forward P/E of 15.93, a P/B of 0.77, and a P/S of 0.34 for NEWM. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. KR is currently priced at a -10.98% to its one-year price target of 26.23. Comparatively, NEWM is -37.07% relative to its price target of 14.00. This suggests that NEWM is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. KR has a beta of 0.61 and NEWM’s beta is 1.13. KR’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. KR has a short ratio of 4.60 compared to a short interest of 6.27 for NEWM. This implies that the market is currently less bearish on the outlook for KR.

Summary

The Kroger Co. (NYSE:KR) beats New Media Investment Group Inc. (NYSE:NEWM) on a total of 8 of the 14 factors compared between the two stocks. KR is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, KR is the cheaper of the two stocks on an earnings and sales basis, Finally, KR has better sentiment signals based on short interest.