Nordstrom Inc. Analysis – July 2015 Update $JWN
Nordstrom Inc. (JWN) may intrigue many investors due to its healthy earnings growth over the last several years and relatively strong dividend yield. In addition, several qualitative factors make the company interesting. For example, Seeking Alpha contributor Equity Watch recently wrote that the company’s online presence will help propel growth further, while contributor Nicholas Mushaike believes the company has good management. On the other hand, contributor Josh Arnold is concerned by the company’s margins. These are great issues to consider, but one must first look at a quantitative analysis of the company.
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 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. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.
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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 tobe 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 that 5 years ago – PASS
Valuation Summary
Key Data
| Recent Price | $76.39 |
| MG Value | $72.42 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $52.51 |
| Value Based on 0% Growth | $30.78 |
| Market Implied Growth Rate | 6.30% |
| Net Current Asset Value (NCAV) | -$8.15 |
| PEmg | 21.09 |
| Current Ratio | 1.84 |
| PB Ratio | 5.83 |
Balance Sheet – April 2015
| Current Assets | $5,418,000,000 |
| Current Liabilities | $2,950,000,000 |
| Total Debt | $3,138,000,000 |
| Total Assets | $9,562,000,000 |
| Intangible Assets | $447,000,000 |
| Total Liabilities | $7,007,000,000 |
| Outstanding Shares | 194,900,000 |
Earnings Per Share
| 2016 (estimate) | $3.61 |
| 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 |
Earnings Per Share – ModernGraham
| 2016 (estimate) | $3.62 |
| 2015 | $3.54 |
| 2014 | $3.31 |
| 2013 | $2.96 |
| 2012 | $2.62 |
| 2011 | $2.37 |
Dividend History
Free Cash Flow
Conclusion
Nordstrom Inc. 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 is only concerned by the level of debt relative to the net current assets. 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 $2.62 in 2012 to an estimated $3.62 for 2016. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 6.3% over the next 7-10 years.
The company’s recent earnings history shows an average annual growth in EPSmg of around 7.7%. 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 Nordstrom Inc. 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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