Retail Stocks

Fossil Group Inc. Quarterly Stock Valuation – September 2014 $FOSL

220px-Fossil_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 Enterprising 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 Fossil Group Inc. (FOSL) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Fossil Group, Inc., formerly Fossil, Inc., a global designer, marketer and distributer company that specializes in consumer fashion accessories. The Company’s offerings include a line of men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories and clothing. Its products are distributed globally through various distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company do not maintain a physical presence. It operates in four different segments: the North America Wholesale segment, the Europe Wholesale segment, Asia Pacific Wholesale segment and the Direct to Consumer segment. On December 31, 2012, the Company purchased substantially all of the assets of Bentrani Watches, LLC (Bentrani).
FOSL Chart

FOSL 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 – PASS
  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 – FAIL
  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 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $102.01
MG Value $232.41
MG Opinion Undervalued
Value Based on 3% Growth $87.53
Value Based on 0% Growth $51.31
Market Implied Growth Rate 4.20%
Net Current Asset Value (NCAV) $4.86
PEmg 16.90
Current Ratio 3.25
PB Ratio 5.38

Balance Sheet – 7/5/2014

Current Assets $1,410,000,000
Current Liabilities $433,700,000
Total Debt $533,200,000
Total Assets $2,160,600,000
Intangible Assets $320,400,000
Total Liabilities $1,151,400,000
Outstanding Shares 53,190,000

Earnings Per Share

2014 (estimate) $6.91
2013 $6.56
2012 $5.59
2011 $4.61
2010 $3.77
2009 $2.07
2008 $2.02
2007 $1.75
2006 $1.13
2005 $1.07
2004 $1.22

Earnings Per Share – ModernGraham

2014 (estimate) $6.04
2013 $5.24
2012 $4.26
2011 $3.34
2010 $2.52
2009 $1.80

Dividend History

Fossil Group does not pay a dividend.

Conclusion:

Fossil Group satisfies the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the lack of dividend payments and the high PB ratio.  The Enterprising Investor’s only initial concern is the lack of dividend payments.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities.  From a valuation perspective, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.52 in 2010 to an estimated $6.04 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 4.20% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the 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 Fossil Group Inc. (FOSL)?  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 Fossil Group Inc. (FOSL) 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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