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 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017. 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 Foot Locker Inc (FL) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates through two segments: Athletic Stores and Direct-to-Customers. The Company’s Athletic Stores segment is an athletic footwear and apparel retailer whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, SIX:02, Runners Point Group, including Runners Point and Sidestep. The Company’s Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and its international e-commerce businesses, which sell to customers through their Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the Websites for eastbay.com, final-score.com, eastbayteamsales.com, and sp24.com. It operates over 3,383 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand. The Company operates over 60 franchised stores that are located in the Middle East, Germany and Switzerland, and Republic of Korea.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of FL – March 2017
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 | $10,034,621,607 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 4.30 | Pass | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Fail | ||
| 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 | 1540.00% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 16.96 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 3.73 | Fail | |
| 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 | 4.30 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 0.00 | 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
| EPSmg | $4.47 |
| MG Growth Estimate | 15.00% |
| MG Value | $172.17 |
| Opinion | Undervalued |
| MG Grade | B- |
| MG Value based on 3% Growth | $64.84 |
| MG Value based on 0% Growth | $38.01 |
| Market Implied Growth Rate | 4.23% |
| Current Price | $75.84 |
| % of Intrinsic Value | 44.05% |
Foot Locker, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the high PB ratio. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.16 in 2014 to an estimated $4.47 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.23% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Foot Locker, Inc. revealed the company was trading above its Graham Number of $48.72. The company pays a dividend of $1.1 per share, for a yield of 1.5% Its PEmg (price over earnings per share – ModernGraham) was 16.96, which was below the industry average of 50.09, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $11.28.
Foot Locker, Inc. performs fairly well in the ModernGraham grading system, scoring a B-.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | $11.28 |
| Graham Number | $48.72 |
| PEmg | 16.96 |
| Current Ratio | 4.30 |
| PB Ratio | 3.73 |
| Current Dividend | $1.10 |
| Dividend Yield | 1.45% |
| Number of Consecutive Years of Dividend Growth | 7 |
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Most Recent Balance Sheet Figures
| Balance Sheet Information | 1/1/2017 |
| Total Current Assets | $2,633,000,000 |
| Total Current Liabilities | $612,000,000 |
| Long-Term Debt | $0 |
| Total Assets | $3,840,000,000 |
| Intangible Assets | $0 |
| Total Liabilities | $1,130,000,000 |
| Shares Outstanding (Diluted Average) | 133,300,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $5.19 |
| Jan2017 | $4.91 |
| Jan2016 | $3.84 |
| Jan2015 | $3.56 |
| Jan2014 | $2.85 |
| Jan2013 | $2.58 |
| Jan2012 | $1.80 |
| Jan2011 | $1.07 |
| Jan2010 | $0.30 |
| Jan2009 | -$0.52 |
| Jan2008 | $0.29 |
| Jan2007 | $1.60 |
| Jan2006 | $1.68 |
| Jan2005 | $1.88 |
| Jan2004 | $1.39 |
| Jan2003 | $1.05 |
| Jan2002 | $0.64 |
| Jan2001 | -$1.73 |
| Jan2000 | $0.43 |
| Jan1999 | -$1.00 |
| Jan1998 | $1.36 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $4.47 |
| Jan2017 | $3.92 |
| Jan2016 | $3.26 |
| Jan2015 | $2.77 |
| Jan2014 | $2.16 |
| Jan2013 | $1.56 |
| Jan2012 | $0.90 |
| Jan2011 | $0.48 |
| Jan2010 | $0.34 |
| Jan2009 | $0.57 |
| Jan2008 | $1.20 |
| Jan2007 | $1.61 |
| Jan2006 | $1.52 |
| Jan2005 | $1.18 |
| Jan2004 | $0.67 |
| Jan2003 | $0.17 |
| Jan2002 | -$0.20 |
Recommended Reading:
Other ModernGraham posts about the company
None. This is the first time ModernGraham has covered the company.
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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.  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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