Kronos' (NYSE:KRO) investors have experienced a traumatic decline in share price of nearly 25% in the past year. This decline has been slightly mitigated with a 3.55% dividend yield, but many investors are doubtless asking when the pain will end. Through this article, I will make the case that Kronos is a strong organization with potential for aggressive growth in the near future.
Return on Assets and Equity
In order to properly evaluate Kronos, we should first examine what types of returns the company is generating. Specifically, we should look at return on assets and return on equity. Return on assets gives investors an idea of how efficiently management uses the firm's assets to generate revenues. Return on equity measures the return that the firm is able to generate on invested shareholder equity.
The chart above shows the five-year historic return on assets and return on equity for Kronos. The first item of interest in the chart is the trend and consistency of the returns through time. For the past five years, Kronos has increased its returns in every single year except one. Not only has it continuously gathered more returns, but it is currently achieving returns that are simply exemplary. Very few organizations are able to consistently generate returns above 15%, and for the three years, Kronos has achieved a return on equity above 15% in nearly every quarter.
These numbers are excellent, but what do they mean? These high levels of returns mean that the organization is not only efficient at using its assets to generate revenues but that it also prudently expends capital to garner strong returns for equity holders. With excellent returns on assets and equity, the firm is in place to expand its operations and in the process continue to satisfy its shareholders. In order to determine if these returns are exemplary or if the firm is simply benefiting from an economy-wide boon, we should also examine Kronos' sector return. Kronos is currently earning a 39% return on equity and its overall sector is only earning an 18% return on equity. Essentially, this means that Kronos is delivering over twice the return on shareholder equity that its peers deliver.
Rather than simply examining growth rates, we should also ask if Kronos' aggressive growth is adding income to the firm. The chart below shows the past five years of quarter net income for Kronos.
As can be seen in the chart above, net income has grown aggressively over the past five years. During the years of 2008 and 2009, the firm was actually consistently losing every quarter, but now it has moved into a solid profit. Not only has the firm become profitable, but it has done so in a consistent manner. Until the previous quarterly data, Kronos delivered progressively higher income in most of the past five years. It is very interesting to note that in the previous quarter, Kronos was particularly hard hit by a decrease in net income of nearly $80 million. I believe that this decrease represents a potential purchasing opportunity.
Since the firm has proven itself to consistently provide stronger return on assets and return on equity, it has clearly demonstrated that it is able to use assets efficiently and satisfy shareholders with excellent returns. Additionally, Kronos is delivering returns at levels that are over twice that of its competitors. Not only is Kronos delivering strong returns, but these returns have transcribed into added profits at the end of the quarter. For the past five years, Kronos has consistently increased its net income, and I believe that the recent quarter of data is an aberration which is not consistent with the picture that the firm has been developing over the previous years. This said, I believe that Kronos is an excellent value trade. The market believes that Kronos is a firm in decline whereas fundamentals show that Kronos is a firm that is consistently growing.
Despite such an ideal trade setup, we as investors should be conscious of the technical landscape within the market. In the chart below, I shown the technical landscape of Kronos, and under the chart, I have written a synopsis of where to participate and avoid the stock.
The above chart shows that Kronos is in a pattern called the "descending wedge" or "descending triangle." This pattern is one in which a price floor has been clearly established and prices are being "squeezed" between a falling trend line and the established floor. As time goes on, price continues to be squeezed between these two lines until an eventual breakout to the upside or the downside occurs. This said, I believe that Kronos will break to the upside, but I am not willing to participate in the trade until the pattern is actually completed. What this practically means is that my entry target into the stock is around $19. If the price at the end of any given month in the near future is above $19 per share, then I will view this analysis as valid. However, if price falls below $14, which has clearly been defined as a floor for the past two years, then I will view this analysis as ill-timed and wait for a better entry. Additionally, the $14 per share level acts as a "pain threshold" for existing shareholders. If you are holding shares in hopes of higher prices in the future, then you should consider selling if prices fall below $14. If prices fall below $14, then a technical downtrend has started on a monthly timeframe and it could potentially be several months or years before shares are able to overcome this barrier once again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.