Apparel Stocks

VF Corporation Analysis – June 2015 Update $VFC

Vfc-lVF Corporation (VFC) may intrigue many investors simply because it is trading below its 52 week high and has some good qualitative factors. For example, Seeking Alpha contributor Pim Keulen recently wrote about the company’s growth in its outdoors & action segment will propel the earningshigher. Similarly, Lester Goh of Leveraged Returns posits the brand’s growing strength in footware and apparel will serve the company well. These are great qualitative considerations, but it is critical when valuing any company to conduct a quantitative analysis.

In fact, 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 VF Corporation 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. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

VFC Chart

VFC data by YCharts

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Defensive Investor – Must pass at least 6 of the following 7 tests: Score = 4/7

  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 one-third over the last 10 years, using three-year averages at the beginning and end of the period – PASS
  6. Moderate PEmg (price over normalized earnings) ratio – PEmg is less than 20 – FAIL
  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 = 5/5

  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 – PASS
  5. Earnings Growth – EPSmg greater than that 5 years ago – PASS

Valuation Summary

Key Data

Recent Price $70.04
MG Value $88.40
MG Opinion Fairly Valued
Value Based on 3% Growth $39.06
Value Based on 0% Growth $22.90
Market Implied Growth Rate 8.75%
NCAV -$1.72
PEmg 26.00
Current Ratio 1.79
PB Ratio 6.20

Balance Sheet – March 2015

Current Assets $4,082,000,000
Current Liabilities $2,278,000,000
Total Debt $1,423,000,000
Total Assets $9,733,000,000
Intangible Assets $4,087,000,000
Total Liabilities $4,829,000,000
Outstanding Shares 434,100,000

Earnings Per Share

2015 (estimate) $3.18
2014 $2.38
2013 $2.71
2012 $2.43
2011 $2.00
2010 $1.30
2009 $1.03
2008 $1.36
2007 $1.31
2006 $1.18
2005 $1.11

Earnings Per Share – ModernGraham

2015 (estimate) $2.69
2014 $2.36
2013 $2.19
2012 $1.83
2011 $1.49
2010 $1.23

Dividend History

VFC Dividend Chart

VFC Dividend data by YCharts

Competitive Comparison

VF Corporation is much more attractive as an investment than some of its competitors. For example, a ModernGraham valuation of Nike Inc. (NYSE:NKE) indicates the company is suitable for the Enterprising Investor but is overvalued. On the other hand, The Gap Inc. (NYSE:GPS) is significantly undervalued and suitable for Enterprising Investors under its most recent ModernGraham valuation.

Conclusion

VF Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the low current ratio and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. Therefore, all Enterprising Investors should feel very comfortable proceeding with the next stage of the analysis, which is a determination of an estimate of intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $1.49 in 2011 to an estimated $2.69 for 2015. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 8.75% over the next 7-10 years.

The company’s recent earnings history shows an average annual growth in EPSmg of around 16%. The ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur, but still returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating VF Corporation is fairly valued at the present time.

Disclaimer:  The author did not hold a position in any 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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