Nordstrom Inc. (NYSE:JWN) should attract all Enterprising Investors, particularly due to the company’s stable earnings growth over the last few years. That said, Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to determine a potential investment’s merits. Here’s an updated look at how the company fares in the ModernGraham valuation model.
This model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.
In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.
JWN data by YCharts
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Defensive Investor – Must pass at least 6 of the following 7 tests: Score = 4/7
- 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 – PASS
- Earnings Growth – Earnings per share has increased by at least one-third over the last 10 years, using three-year averages at the beginning and end of the period – PASS
- Moderate PEmg (price over normalized earnings) ratio – PEmg is less than 20 – FAIL
- 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
Valuation Summary
Key Data:
| Recent Price | $77.12 |
| MG Value | $82.57 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $51.38 |
| Value Based on 0% Growth | $30.12 |
| Market Implied Growth Rate | 6.63% |
| Net Current Asset Value (NCAV) | -$8.14 |
| PEmg | 21.76 |
| Current Ratio | 1.87 |
| PB Ratio | 6.14 |
Balance Sheet – January 2015
| Current Assets | $5,224,000,000 |
| Current Liabilities | $2,800,000,000 |
| Total Debt | $3,123,000,000 |
| Total Assets | $9,245,000,000 |
| Intangible Assets | $435,000,000 |
| Total Liabilities | $6,805,000,000 |
| Outstanding Shares | 194,200,000 |
Earnings Per Share
| 2015 | $3.72 |
| 2014 | $3.71 |
| 2013 | $3.56 |
| 2012 | $3.14 |
| 2011 | $2.75 |
| 2010 | $2.01 |
| 2009 | $1.83 |
| 2008 | $2.88 |
| 2007 | $2.55 |
| 2006 | $1.98 |
| 2005 | $1.39 |
Earnings Per Share – ModernGraham
| 2015 | $3.54 |
| 2014 | $3.31 |
| 2013 | $2.96 |
| 2012 | $2.62 |
| 2011 | $2.37 |
| 2010 | $2.21 |
Dividend History
JWN Dividend data by YCharts
Conclusion
Nordstrom should satisfy the Enterprising Investor, but not the Defensive Investor. The Defensive Investor is concerned with the low current ratio along with the high PEmg and PB ratios while the Enterprising Investor is only concerned by the level of debt relative to the net current assets. Therefore, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $2.37 in 2011 to $3.54 for 2015. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 6.63% over the next 7-10 years. The ModernGraham valuation model, therefore, returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating the company is fairly valued at the present time.
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