L Brands Inc. (LB) Annual Valuation

When a company has some very popular brands, it can be tempting to assume that it is a good investment.  Especially if those brands seem significantly stronger than competitor’s brands.  This is one important factor in what is called a company’s “moat” and many investors will stop the analysis there, speculating that since the company has a large moat, it will be a safe investment over the long term.  But Intelligent Investors know that the analysis must go further than that, as the intrinsic value is based fundamentals of the company as Benjamin Graham taught.  We must analyze those fundamentals in an attempt to gauge the risk level of the company and determine an estimate of the intrinsic value of the company.  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.  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 L Brands Inc. (LB) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): L Brands, Inc., formerly Limited Brands, Inc operates in the specialty retail business. The Company is a specialty retailer of women’s intimate and other apparel, beauty and personal care products and accessories. It operates in two segments: Victoria’s Secret and Bath & Body Works. It sells its merchandise through Company-owned specialty retail stores in the United States, Canada and the United Kingdom, which are primarily mall-based, and through Websites, catalogue and international franchise, license and wholesale partners. It operates in brands, such as Victoria’s Secret, Victoria’s Secret Pink, Bath & Body Works, La Senza, and Henri Bendel. Its business for both the Victoria’s Secret and Bath & Body Works segments is principally conducted from office, distribution and shipping facilities located in the Columbus, Ohio area. As of February 2, 2013, it operated 2,619 retail stores located in leased facilities, primarily in malls and shopping centers, throughout United States.

LB data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
5. 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
6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
7. 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 = 3/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
3. Earnings Stability – positive earnings per share for at least 5 years – PASS
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price	$53.53
MG Value	$98.63
MG Opinion	Undervalued
Value Based on 3% Growth	$38.18
Value Based on 0% Growth	$22.38
Market Implied Growth Rate	5.91%
NCAV	-$16.81
PEmg	20.33
Current Ratio	1.49
PB Ratio	-18.93

Balance Sheet – 11/2/2013

Current Assets	$2,580,000,000
Current Liabilities	$1,734,000,000
Total Debt	$4,762,000,000
Total Assets	$6,636,000,000
Intangible Assets	$1,729,000,000
Total Liabilities	$7,456,000,000
Outstanding Shares	290,000,000

Earnings Per Share

2014 (estimate)	$3.00
2013	$2.54
2012	$2.71
2011	$2.42
2010	$1.37
2009	$0.65
2008	$1.89
2007	$1.68
2006	$1.62
2005	$1.47
2004	$1.36

Earnings Per Share – ModernGraham 

2014 (estimate)	$2.63
2013	$2.28
2012	$2.04
2011	$1.67
2010	$1.34
2009	$1.37

Dividend History

LB Dividend data by YCharts

Conclusion:

L Brands Inc. is not suitable for either the Defensive Investor or the Enterprising Investor.  The company’s current ratio is too low and the PEmg ratio is too high for the Defensive Investor.  For the Enterprising Investor, there is too much debt relative to the company’s current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should research other opportunities, such as by reviewing a list of 5 Low PE Companies for the Defensive Investor or a list of 5 Undervalued Companies for the Enterprising Investor.  From a valuation perspective, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.34 in 2010 to an estimated $2.63 for 2014.  This level of demonstrated historical growth outpaces the market’s current implied estimate for growth of 5.91%, leading the ModernGraham valuation model to return an intrinsic value estimate that surpasses the market’s current price.

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 L Brands Inc. (LB)?  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.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in L Brands Inc. (LB) or 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 the Wikipedia; this article is not affiliated with the company in any manner.