The Gap Inc. performs well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the low current ratio and the high PB ratio, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.52 in 2011 to $2.49 for 2015. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of only 3.94% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.
Be sure to check out previous ModernGraham valuations of The Gap Inc. (GPS) for a greater perspective!
Disclaimer: The author did not hold a position in The Gap Inc. (GPS) 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.