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Retail Stocks

Nordstrom Inc. Quarterly Valuation – July 2014 $JWN

200px-Dow_Chemical_Company_logo.svgBenjamin 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 Undervalued Companies for the Defensive Investor.  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 Nordstrom Inc. (JWN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): 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.
JWN Chart

JWN 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 - PASS
  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 = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  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 $67.78
MG Value $85.40
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
PEmg 18.92
Current Ratio 1.98
PB Ratio 6.30

Balance Sheet – 5/3/2014

Current Assets $5,207,000,000
Current Liabilities $2,631,000,000
Total Debt $3,110,000,000
Total Assets $8,633,000,000
Intangible Assets $175,000,000
Total Liabilities $6,597,000,000
Outstanding Shares 189,300,000

Earnings Per Share

2015 (estimate) $3.84
2014 $3.71
2013 $3.56
2012 $3.14
2011 $2.75
2010 $2.01
2009 $1.83
2008 $2.87
2007 $2.55
2006 $1.98
2005 $1.38

Earnings Per Share – ModernGraham

2015 (estimate) $3.58
2014 $3.31
2013 $2.96
2012 $2.62
2011 $2.37
2010 $2.20

Dividend History

JWN Dividend Chart

JWN Dividend data by YCharts

Conclusion:

Nordstrom qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the low current ratio 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 fairly 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 market’s implied estimate of 5.21% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

Be sure to check out the previous ModernGraham valuations of Nordstrom Inc. (JWN) for more perspective!

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 Nordstrom Inc. (JWN)?  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.

Disclaimer:  The author did not hold a position in Nordstrom Inc. (JWN) or 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.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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