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 Most Undervalued Companies for the Defensive Investor – February 2015. 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 L Brands Inc. (LB) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): L Brands, Inc. operates in the specialty retail business. The Company is a specialty retailer of women’s intimate and other apparel, beauty and personal care products and accessories. The Company sells its merchandise through company-owned specialty retail stores in the United States, Canada and the United Kingdom, which are mall-based. It also sells its products through websites, catalogue and international franchise, license and wholesale partners. The Company operates in three reportable segments: Victoria’s Secret, Bath & Body Works and Victoria’s Secret and Bath & Body Works International. The Company operates the retail brands: Victoria’s Secret, PINK, Bath & Body Works, La Senza and Henri Bende.
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 -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- 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 -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 -Â 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 PASS
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 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- 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 -Â PASS
Valuation Summary
Key Data:
| Recent Price | $91.56 |
| MG Value | $94.36 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $42.96 |
| Value Based on 0% Growth | $25.18 |
| Market Implied Growth Rate | 11.20% |
| NCAV | -$15.89 |
| PEmg | 30.90 |
| Current Ratio | 1.58 |
| PB Ratio | -62.87 |
Balance Sheet – October 2014
| Current Assets | $2,849,000,000 |
| Current Liabilities | $1,799,000,000 |
| Total Debt | $4,759,000,000 |
| Total Assets | $7,149,000,000 |
| Intangible Assets | $1,729,000,000 |
| Total Liabilities | $7,583,000,000 |
| Outstanding Shares | 298,000,000 |
Earnings Per Share
| 2015 (estimate) | $3.36 |
| 2014 | $3.05 |
| 2013 | $2.54 |
| 2012 | $2.70 |
| 2011 | $2.42 |
| 2010 | $1.37 |
| 2009 | $0.65 |
| 2008 | $1.89 |
| 2007 | $1.68 |
| 2006 | $1.66 |
| 2005 | $1.47 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $2.96 |
| 2014 | $2.65 |
| 2013 | $2.28 |
| 2012 | $2.03 |
| 2011 | $1.67 |
| 2010 | $1.34 |
Dividend History
Conclusion:
L Brands Inc. is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the low current ratio and the high PEmg ratio, while the Enterprising Investor’s only initial concern is the 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 very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.67 in 2011 to an estimated $2.96 for 2015.  This level of demonstrated growth supports the market’s implied estimate of 11.2% 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 previous ModernGraham valuations of L Brands Inc. (LB) for greater 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 L Brands Inc. (LB)?  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 L Brands Inc. (LB) 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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