Gap Inc. May 2014 Quarterly Valuation $GPS
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 Lowest PEmg Companies for Enterprising Investors. 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 Gap Inc. (GPS) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): The Gap, Inc. (Gap Inc.),is a global specialty apparel company. Gap Inc. offers apparel, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. The Company operates in two segments: Stores, which includes the operations of the retail stores for Gap, Old Navy, and Banana Republic, and Direct, which includes the operations for its online brands, both domestic and international. It has Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, China, and Italy. It also has franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores. Under these agreements, third parties operate or will operate stores that sell apparel and related products under its brand names. In February 2014, GAP Inc announced the Old Navy’s opening of the brand’s first store in China.
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 – FAIL
- 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 – PASS
- 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 -Â 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 = 5/5
- 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 – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $40.96 |
| MG Value | $63.86 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $31.94 |
| Value Based on 0% Growth | $18.72 |
| Market Implied Growth Rate | 5.05% |
| NCAV | -$0.80 |
| PEmg | 18.60 |
| Current Ratio | 1.81 |
| PB Ratio | 5.97 |
Balance Sheet – 3/31/2014
| Current Assets | $4,430,000,000 |
| Current Liabilities | $2,445,000,000 |
| Total Debt | $1,369,000,000 |
| Total Assets | $7,849,000,000 |
| Intangible Assets | $311,000,000 |
| Total Liabilities | $4,787,000,000 |
| Outstanding Shares | 446,000,000 |
Earnings Per Share
| 2014 | $2.74 |
| 2013 | $2.33 |
| 2012 | $1.56 |
| 2011 | $1.88 |
| 2010 | $1.58 |
| 2009 | $1.34 |
| 2008 | $1.09 |
| 2007 | $0.93 |
| 2006 | $1.24 |
| 2005 | $1.21 |
| 2004 | $1.04 |
Earnings Per Share – ModernGraham
| 2014 | $2.20 |
| 2013 | $1.87 |
| 2012 | $1.59 |
| 2011 | $1.52 |
| 2010 | $1.31 |
| 2009 | $1.17 |
Dividend History
GPS Dividend data by YCharts
Conclusion:
Gap Inc. qualifies for Enterprising Investors but not for Defensive Investors.  The company does not pass the Defensive Investor’s requirements regarding the current ratio or the PB ratio, but the company passes all of the requirements of the Enterprising Investor.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors through a review of ModernGraham’s valuation of Urban Outfitters (URBN).  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.31 in 2010 to $2.20 in 2014.  This demonstrated level of growth surpasses the market’s implied estimate of 5.05% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value well above the market 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 Gap Inc. (GPS)?  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.
Be sure to review the previous ModernGraham Valuations of Gap Inc. (GPS)!
Disclaimer: Â The author did not hold a position in Gap Inc. (GPS) 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 wikipedia; this article is not affiliated with the company in any manner.
