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 for the Defensive Investor.Â 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 Nordstrom Inc. (JWN)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Nordstrom, Inc. is a fashion specialty retailer. As of March 18, 2013, the Company operates 242 United States stores located in 31 states, as well as an e-commerce business through nordstrom.com. The Company operates in two segments: Retail and Credit. As of December February 02, 2013, the Company had opened two Nordstrom Rack stores (Boston, Massachusetts and Upland, California). As of March 18, 2013, the Retail segment includes its 117 Nordstrom branded full-line stores and its online store at www.nordstrom.com, its 121 off-price Nordstrom Rack stores, one clearance store that operates under the name Last Chance and its other retail channels, including its online private sale subsidiary HauteLook, its two Jeffrey boutiques and one treasure&bond store. Its Credit segment includes its wholly owned federal savings bank, Nordstrom fsb, through which the Company provides a private label credit card, two Nordstrom VISA credit cards and a debit card.
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 -Â 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 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 – FAIL
- 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
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$51.96|
|Value Based on 0% Growth||$30.46|
|Market Implied Growth Rate||5.21%|
|Net Current Asset Value (NCAV)||-$7.34|
Balance Sheet – 5/3/2014
Earnings Per Share
Earnings Per Share – ModernGraham
NordstromÂ qualifiesÂ for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the low current ratioÂ and the high PB ratio. The Enterprising Investor’s only issue is with the high level of debt relative to the net current assets. 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 including a review of ModernGraham’s valuation of Macy’s (M) and ModernGraham’s valuation of The TJX Companies (TJX). From a valuation side of things, the company appears to be fairlyÂ valued after growing its EPSmg (normalized earnings) from $2.37 in 2011 to an estimated $3.58 for 2015. This level of demonstrated growth supports the marketâ€™s implied estimate ofÂ 5.21% earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative toÂ the price.
Be sure to check out theÂ previousÂ ModernGraham valuations of Nordstrom Inc. (JWN)Â for more perspective!
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 on Nordstrom Inc. (JWN)? 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.
Disclaimer: Â The author did not hold a position in Nordstrom Inc. (JWN)Â orÂ 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. Â Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.