Following the steps from gurufocus.com to calculate the fair value of security of my restaurant Kroger Co.
Net Cash = Cash + Cash Equivalents + Investment of short term – Total Liabilities.
The net cash is calculated by adding the liquid assets, often called as cash equivalents, cash and the investments of short term. The total sum is then subtracted with total liabilities of the company to get the net cash value.
Total Liabilities = 25144
=1256 - 25144
Net Current Asset Value (NCAV) = Investment of short term + Cash + (0.5 * Inventory) + (0.75 * Accounts Receivable) - Total Liabilities
/> = 1256+0.75*1266+0.5*5688-25144
Intrinsic Value from discounted cash flow model of Kroger Co. is calculated using following formula as done in GuruGocus
Value = FCF(6 year avg) * (Growth Multiple) + 0.8* [Total Equity(most recent)/shares outstanding]
The growth multiple is topped between 8.35 & 17.74.
According to the step mentioned in Gurufocus.com, the growth multiple is calculated from total equity weighing. Weighing from zero to above 100% is taken but for this 80% weight is taken i.e. growth multiple = 12.9591.
The average 6-year free cash flow= $1,125.17
Total equity from April 2015= 5557
Shares outstanding = 984
Therefore, Value = $19.34
Graham Number = Square Root of (22.5 * Book Value * Earnings per share)
Median P/S Value = Total Annual Sales / Shares Outstanding * 10-Year Median P/S Ratio.
Peter Lynch Fair Value = PEG * 5-Year rate of earnings growth * Earnings
Now, the earning per share is $1.87
Taking growth rate of 10% for next 10 years, terminal growth rate 4% for 10 years of terminal growth at discount rate of 12%, gurufocus.com has calculated,
Tangible Book Value = $2.56
Growth Value = $16.96
Terminal Value = $10.64
Finally giving Fair Value of $27.58
The Stock Price of Krogar Co. on today’s date is $39.12
Hence, by comparing the fair value out of various fair value along with that of stock price of Krogar Co., it can be seen that the stock price of Krogar is reasonably higher except for Peter Lynch Fair Value. The stock of the Krogar Co. is overpriced. So, we can say that the Gurus do not think that the assessment of Krogar Co. is worth more than its price on the stock exchange. It worth rather less. Looking at the various face values, I too conclude that the share of Krogar is overpriced, as the market value is almost double to the intrinsic value of the Share. There can be several reasons behind this situation, and these reasons must be identified before its too late. When the stock is undervalued, then the stockholders are not having their wealth at its maximum. So, provide the worth value to their investment, the stock must be valued fairly rather than undervaluing. The overpriced stock might have less demand in the market making the investment in these stocks to be illiquid.