On August 4, 2023, VF Corp (VFC, Financial) reported a daily gain of 3.78% with an Earnings Per Share (EPS) (EPS) of $0.3. However, the question arises: Is the stock a potential value trap? This article aims to answer this question by conducting an in-depth valuation analysis of VF Corp. We invite you to delve into this comprehensive breakdown of the company's financial health and prospects.
Company Overview
VF Corp (VFC, Financial) designs, manufactures, and distributes branded apparel, footwear, and accessories. With a portfolio of about a dozen brands including Vans, The North Face, Timberland, Supreme, and Dickies, VF Corp caters to a diverse market. The company operates in the Americas, Europe, and Asia-Pacific through wholesale sales to retailers, e-commerce, and branded stores owned by the company and partners. VF Corp, which traces its roots back to 1899, has grown through multiple acquisitions.
The company's stock is currently trading at $19.76 per share, giving it a market cap of $7.7 billion. However, the GF Value, an estimation of the stock's fair value, stands at $66.82, indicating a potential value trap.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed using historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
For VF Corp, the GF Value suggests a possible value trap scenario. This estimate is derived from historical multiples at which the stock has traded, the company's past growth, and future business performance estimates. If a stock's price is significantly above the GF Value Line, it is deemed overvalued and likely to deliver poor future returns. Conversely, if it is significantly below the GF Value Line, its future returns are expected to be higher.
Financial Strength Analysis
Investing in companies with poor financial strength carries a higher risk of permanent capital loss. It is essential to review a company's financial strength before deciding to invest. Key indicators such as the cash-to-debt ratio and interest coverage provide valuable insights. VF Corp has a cash-to-debt ratio of 0.1, which is worse than 77.59% of companies in the Manufacturing - Apparel & Accessories industry. The overall financial strength of VF Corp is ranked at 4 out of 10, indicating poor financial health.
Profitability and Growth
Consistent profitability over the long term reduces investment risk. Higher profit margins usually indicate a better investment compared to a company with lower profit margins. VF Corp has been profitable for 9 of the past 10 years. Over the past twelve months, the company generated revenue of $11.4 billion and an EPS of $0.3. Its operating margin is 8.66%, ranking better than 71.97% of companies in the Manufacturing - Apparel & Accessories industry. Overall, VF Corp's profitability is ranked 6 out of 10, indicating fair profitability.
Company growth is a crucial factor in valuation. A faster-growing company creates more value for shareholders, especially if the growth is profitable. VF Corp's 3-year average annual revenue growth is 4.5%, ranking better than 56.23% of companies in the Manufacturing - Apparel & Accessories industry. However, its 3-year average EBITDA growth rate is -23.1%, which ranks worse than 89.52% of companies in the industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC) can provide insights into its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. For the past 12 months, VF Corp's ROIC stands at 24.95, and its WACC is 7.76, suggesting that the company is creating value for shareholders.
Identifying a Possible Value Trap
Despite VF Corp's low valuation, certain indicators suggest it might be a value trap. With a Piotroski F-score of only 2 out of a possible 9, potential concerns arise. This low score may signal a downward trend in critical aspects such as profitability, funding, and efficiency. Investors should look beyond the appealing low valuation and ensure there are no concealed long-term risks. To better understand the Piotroski F-score, please click here.
Furthermore, the Altman Z-score for VF Corp stands at 1.38, placing the company's financial health in the distress zone and signalling an increased bankruptcy risk. Ideally, an Altman Z-score above 2.99 reflects a safer financial position. To further comprehend the Z-score's role in assessing a company's financial risk, please click here.
Conclusion
In summary, VF Corp's stock appears to be a potential value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks worse than 89.52% of companies in the Manufacturing - Apparel & Accessories industry. To learn more about VF Corp stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
