Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies with a Low Beta.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how VF Corp (VFC)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â V.F. Corporation (VF) is a global apparel company based in the United States. The Company designs and manufactures or sources from independent contractors a variety of apparel and footwear for all ages, including jeanswear, outerwear, footwear, packs, luggage, sportswear, and occupational and performance apparel. Products are marketed primarily under VF-owned brand names. It is a diversified apparel company across brands, product categories, channels of distribution and geographies. These products are marketed to consumers shopping in specialty stores, upscale and traditional department stores, national chains and mass merchants. These groupings of businesses are called coalitions and consist of the following: Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. On April 30, 2012, the Company sold its 80% ownership in John Varvatos Enterprises, Inc.
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 -Â 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 – PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â 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 -Â 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 -Â PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$37.43|
|Value Based on 0% Growth||$21.94|
|Market Implied Growth Rate||8.05%|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
VF CorpÂ qualifies for the Enterprising Investor but not the Defensive Investor, who is concerned with the high price-to-earnings ratio and the high price-to-book ratio. Â The company passes all of the Enterprising Investors requirements. Â 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 comparing it to other opportunities through a review of ModernGraham’s valuation of Ralph Lauren (RL) and ModernGraham’s valuation of Nike (NKE). Â From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.24 in 2010 to an estimated $2.58 for 2014. Â This level of demonstrated growth more than supports the market’s implied estimate of 8.05% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value that is well aboveÂ the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put onÂ VF Corp (VFC)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Be sure to review the previousÂ ModernGraham Valuations of VF Corp (VFC)!
Disclaimer: Â The author did not hold a position in VF Corp (VFC) 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.