Gap Inc Valuation – May 2018 $GPS

Company Profile (excerpt from Reuters): The Gap, Inc. (Gap Inc.), incorporated on April 15, 1988, 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, Athleta and Intermix brands. The Company’s products are available to customers online through Company-owned Websites and through the use of third-parties that provide logistics and fulfillment services. In addition to operating in the specialty, outlet, online and franchise channels, it also use the Company’s omni-channel capabilities to bridge the digital world and physical stores. The Company’s omni-channel services, including order-in-store, reserve-in-store, find-in-store and ship-from-store that are tailored across its portfolio of brands. The Company also sells products that are designed and manufactured by branded third-parties, especially at its Intermix brands. Gap Inc. has Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China, Hong Kong, Taiwan, and Mexico. It operates Gap, Banana Republic and Old Navy stores throughout Asia, Australia, Europe, Latin America, the Middle East and Africa.

GPS Chart

GPS data by YCharts


Downloadable PDF version of this valuation:

ModernGraham Valuation of GPS – May 2018

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 $11,225,274,504 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.86 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 23.11% Fail
6. Moderate PEmg Ratio PEmg < 20 13.39 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.65 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 1.86 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.59 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 Fail


Stage 2: Determination of Intrinsic Value

EPSmg $2.18
MG Growth Estimate -1.85%
MG Value $10.49
Opinion Overvalued
MG Grade C+
MG Value based on 3% Growth $31.62
MG Value based on 0% Growth $18.54
Market Implied Growth Rate 2.45%
Current Price $29.21
% of Intrinsic Value 278.58%

Gap Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years. The Enterprising Investor is only concerned with the lack of earnings growth over the last five years. 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 Overvalued after seeing its EPSmg (normalized earnings) decline from $2.49 in 2015 to an estimated $2.18 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 2.45% 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 below the price.

At the time of valuation, further research into Gap Inc revealed the company was trading above its Graham Number of $20.49. The company pays a dividend of $0.92 per share, for a yield of 3.1%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 13.39, which was below the industry average of 49.11, 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 $-0.7.

Gap Inc receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$0.70
Graham Number $20.49
PEmg 13.39
Current Ratio 1.86
PB Ratio 3.65
Current Dividend $0.92
Dividend Yield 3.15%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 1/1/2018
Total Current Assets $4,568,000,000
Total Current Liabilities $2,461,000,000
Long-Term Debt $1,249,000,000
Total Assets $7,989,000,000
Intangible Assets $204,000,000
Total Liabilities $4,845,000,000
Shares Outstanding (Diluted Average) 393,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.35
Jan2018 $2.14
Jan2017 $1.69
Jan2016 $2.23
Jan2015 $2.87
Jan2014 $2.74
Jan2013 $2.33
Jan2012 $1.56
Jan2011 $1.88
Jan2010 $1.58
Jan2009 $1.58
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.18
Jan2018 $2.18
Jan2017 $2.25
Jan2016 $2.47
Jan2015 $2.49
Jan2014 $2.20
Jan2013 $1.88
Jan2012 $1.62
Jan2011 $1.57
Jan2010 $1.36
Jan2009 $1.24
Jan2008 $1.08
Jan2007 $1.06
Jan2006 $1.02
Jan2005 $0.86
Jan2004 $0.72
Jan2003 $0.60

Recommended Reading:

Other ModernGraham posts about the company

10 Low PE Stock Picks for the Defensive Investor – August 2017
10 Undervalued Companies for the Defensive Dividend Stock Investor – February 2017
12 Best Stocks for Value Investors This Week – 2/4/17
Gap Inc Valuation – January 2017 $GPS
10 Low PE Stock Picks for the Defensive Investor – January 2017

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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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