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 10 Companies Benjamin Graham Would Invest In Today – July 2016. 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 stock analysis showing a specific look at how L Brands Inc (LB) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): L Brands, Inc. operates specialty retail business. The Company is focused on women’s intimate and other apparel, personal care and beauty categories. The Company operates through three segments: Victoria’s Secret, Bath & Body Works, and Victoria’s Secret and Bath & Body Works International. Victoria’s Secret segment includes PINK, which is the specialty retailer of women’s intimate and other apparel with collections, fragrances, supermodels and runway shows. Bath & Body Works segment is the specialty retailer of home fragrance and personal care products, including shower gels, lotions, soaps and sanitizers. Victoria’s Secret and Bath & Body Works International segment includes the Victoria’s Secret and Bath & Body Works company-owned and partner-operated stores outside of the United States and Canada. The Company operates the retail brands, which include Victoria’s Secret, Bath & Body Works, La Senza and Henri Bendel. Henri Bendel is an operator of over 30 specialty stores.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$21,003,435,886||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.86||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||186.96%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||20.67||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||-19.88||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||1.86||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||4.13||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||8.51%|
|MG Value based on 3% Growth||$51.74|
|MG Value based on 0% Growth||$30.33|
|Market Implied Growth Rate||6.08%|
|% of Intrinsic Value||81.01%|
L Brands Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $2.28 in 2013 to an estimated $3.57 for 2017. This level of demonstrated earnings growth supports the market’s implied estimate of 6.08% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.
L Brands Inc performs fairly well in the ModernGraham grading system, scoring a B-.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$18.85|
|Number of Consecutive Years of Dividend Growth||6|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||4/1/2016|
|Total Current Assets||$2,991,000,000|
|Total Current Liabilities||$1,605,000,000|
|Shares Outstanding (Diluted Average)||293,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.50|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$3.57|
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.