Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Dow Components to Research – December 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Urban Outfitters Inc. (URBN) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Urban Outfitters, Inc. (Urban Outfitters) is a specialty retail company that offers a variety of lifestyle merchandise. The Company operates its business under two segments: Retail and Wholesale. The Retail segment consists of the Urban Outfitters, Anthropologie, Free People, Terrain and Bhldn brands, whose merchandise is sold directly to the Company’s customers through retail stores, websites, mobile applications, catalogs and customer contact centers. The Company’s retail stores offer fashion apparel, accessories and home goods. As of January 31, 2014, the Company operated 511 stores, of which 442 were located in the United States, 44 stores in Europe and 25 stores in Canada. The Wholesale segment consists of the Free People wholesale division that primarily designs, develops and markets young women’s contemporary casual apparel and sells the merchandise through approximately 1,400 department and specialty stores across the world.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$23.49|
|Value Based on 0% Growth||$13.77|
|Market Implied Growth Rate||5.57%|
Balance Sheet – October 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Urban Outfitters does not pay a dividend.
Urban Outfitters Inc. is suitable for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the lack of dividends as well as the high PB ratio, while the Enterprising Investor is only concerned by the lack of dividends. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.28 in 2011 to only an estimated $1.62 for 2015. This level of demonstrated growth does not support the market’s implied estimate of 5.57% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
Be sure to check out previous ModernGraham valuations of Urban Outfitters Inc. (URBN) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Urban Outfitters Inc. (URBN)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Urban Outfitters Inc. (URBN) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.