Gap Inc Valuation – February 2016 $GPS

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 10 Companies Benjamin Graham Would Invest In Today – February 2016.  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 stock analysis showing a specific look at how Gap Inc (GPS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Gap, Inc. is an apparel retail company. The Company offers apparel, accessories, and personal care products for men, women, and children under the Gap, Banana Republic, Old Navy, Piperlime, Athleta and Intermix brands. In addition to operating in the specialty, outlet, online and franchise channels, Gap Inc. is an apparel retailer in using omni-channel capabilities for digital world and physical stores. Its omni-channel services include order-in-store, reserve-in-store, find-in-store and ship-from-store that are tailored across its portfolio of brands. Gap includes GapKids, babyGap, GapMaternity, GapBody and GapFit collections. It also offers handbags, shoes, jewelry, eyewear and personal care products, among others. It has Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China and Hong Kong. It operates Gap, Banana Republic and Old Navy stores throughout Asia, Australia, Europe, Latin America, the Middle East and Africa.


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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.


Downloadable PDF version of this valuation:

ModernGraham Valuation of GPS

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $9,583,192,859 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.58 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 133.43% Pass
6. Moderate PEmg Ratio PEmg < 20 9.82 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.75 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.58 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.84 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

GPS value chart February 2016

EPSmg $2.44
MG Growth Estimate 8.09%
MG Value $60.25
Opinion Undervalued
MG Value based on 3% Growth $35.40
MG Value based on 0% Growth $20.75
Market Implied Growth Rate 0.66%
Current Price $23.98
% of Intrinsic Value 39.80%

Gap Inc qualifies for both the Enterprising Investor and the more conservative Defensive Investor.  The Defensive Investor is only initially concerned by the low current ratio while the Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.59 in 2012 to an estimated $2.44 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.66% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Stage 3: Information for Further Research

GPS charts February 2016

Net Current Asset Value (NCAV) -$2.05
Graham Number $17.64
PEmg 9.82
Current Ratio 1.58
PB Ratio 3.75
Dividend Yield 3.79%
Number of Consecutive Years of Dividend Growth 6



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Most Recent Balance Sheet Figures

Balance Sheet Information Oct2015
Total Current Assets $4,361,000,000
Total Current Liabilities $2,768,000,000
Long-Term Debt $1,331,000,000
Total Assets $7,806,000,000
Intangible Assets $0
Total Liabilities $5,197,000,000
Shares Outstanding (Diluted Average) 408,000,000

Earnings Per Share History

Next Fiscal Year Estimate $2.14
Jan2015 $2.87
Jan2014 $2.74
Jan2013 $2.33
Jan2012 $1.56
Jan2011 $1.88
Jan2010 $1.58
Jan2009 $1.34
Jan2008 $1.05
Jan2007 $0.93
Jan2006 $1.24
Jan2005 $1.21
Jan2004 $1.09
Jan2003 $0.54
Jan2002 -$0.03
Jan2001 $1.00
Jan2000 $1.26
Jan1999 $0.91
Jan1998 $0.58
Jan1997 $0.47

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.44
Jan2015 $2.49
Jan2014 $2.20
Jan2013 $1.87
Jan2012 $1.59
Jan2011 $1.52
Jan2010 $1.30
Jan2009 $1.16
Jan2008 $1.08
Jan2007 $1.06
Jan2006 $1.02
Jan2005 $0.86
Jan2004 $0.72
Jan2003 $0.60
Jan2002 $0.67
Jan2001 $0.96
Jan2000 $0.84

Recommended Reading:

Other ModernGraham posts about the company

10 Low PE Stocks for the Enterprising Investor – January 2016
5 Undervalued Companies for Enterprising Investors Near 52 Week Lows – August 2015
The Best Companies of the Apparel Industry – June 2015 $GPS $HBI $KORS $RL $VFC
5 Undervalued Companies for Enterprising Investors Near 52 Week Lows – July 2015
The 6 Best Stocks For Value Investors This Week – 6/13/15

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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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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