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Apparel Stocks

L Brands Inc Valuation – January 2019 $LB

Company Profile (excerpt from Reuters): L Brands, Inc., incorporated on March 16, 1982, operates specialty retail business. The Company is focused on women’s intimate and other apparel, personal care, beauty and home fragrance categories. The Company’s segments include Victoria’s Secret, Bath & Body Works, and Victoria’s Secret and Bath & Body Works International. The Company sells its merchandise through company-owned specialty retail stores in the United States, Canada, the United Kingdom and Greater China (China and Hong Kong), which are mall-based; through Websites, and through international franchise, license and wholesale partners. The Company operates in the retail brands, which include Victoria’s Secret, PINK, Bath & Body Works and La Senza. La Senza is a specialty retailer of women’s intimate apparel. As of January 28, 2017, the Company sold its La Senza products at over 120 La Senza stores in Canada and online at www.LaSenza.com. As of January 28, 2017, Henri Bendel sold handbags, jewelry and other accessory products through New York and 28 other stores, as well as online at www.HenriBendel.com. Mast Global is a merchandise sourcing and production function serving the Company and its international partners.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of LB – January 2019

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 $7,623,713,498 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.37 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 48.23% Pass
6. Moderate PEmg Ratio PEmg < 20 8.54 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 -5.81 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 1.37 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 7.35 Fail
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 $3.24
MG Growth Estimate 1.17%
MG Value $35.16
Opinion Fairly Valued
MG Grade C-
MG Value based on 3% Growth $47.04
MG Value based on 0% Growth $27.57
Market Implied Growth Rate 0.02%
Current Price $27.71
% of Intrinsic Value 78.80%

L Brands Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PB ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $3.01 in 2015 to an estimated $3.24 for 2019. This level of demonstrated earnings growth supports the market’s implied estimate of 0.02% 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 within a margin of safety relative to the price.

At the time of valuation, further research into L Brands Inc revealed the company was trading above its Graham Number of $0. The company pays a dividend of $2.4 per share, for a yield of 8.7%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 8.54, which was below the industry average of 32.21, 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 $-22.57.

L Brands 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) -$22.57
Graham Number $0.00
PEmg 8.54
Current Ratio 1.37
PB Ratio -5.81
Current Dividend $2.40
Dividend Yield 8.66%
Number of Consecutive Years of Dividend Growth 7

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Most Recent Balance Sheet Figures

Balance Sheet Information 10/1/2018
Total Current Assets $2,933,000,000
Total Current Liabilities $2,142,000,000
Long-Term Debt $5,814,000,000
Total Assets $7,829,000,000
Intangible Assets $1,759,000,000
Total Liabilities $9,141,000,000
Shares Outstanding (Diluted Average) 275,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.22
Jan2018 $3.42
Jan2017 $3.98
Jan2016 $4.22
Jan2015 $3.50
Jan2014 $3.05
Jan2013 $2.54
Jan2012 $2.70
Jan2011 $2.42
Jan2010 $1.37
Jan2009 $0.65
Jan2008 $1.89
Jan2007 $1.68
Jan2006 $1.66
Jan2005 $1.47
Jan2004 $1.36
Jan2003 $0.96
Jan2002 $1.16
Jan2001 $0.91
Jan2000 $0.93
Jan1999 $4.15

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.24
Jan2018 $3.72
Jan2017 $3.73
Jan2016 $3.47
Jan2015 $3.01
Jan2014 $2.65
Jan2013 $2.28
Jan2012 $2.03
Jan2011 $1.67
Jan2010 $1.34
Jan2009 $1.38
Jan2008 $1.70
Jan2007 $1.54
Jan2006 $1.42
Jan2005 $1.26
Jan2004 $1.12
Jan2003 $1.21

Recommended Reading:

Other ModernGraham posts about the company

L Brands Inc Valuation – March 2018 $LB
10 Best Dividend Paying Stocks for the Enterprising Investor – February 2017
5 Companies for Enterprising Investors Near 52 Week Lows – February 2017
10 Best Dividend Paying Stocks for the Enterprising Investor – January 2017
10 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017

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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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