Value-focused investors constantly seek stocks priced below their intrinsic value. One such stock that deserves attention is VF Corp (VFC, Financial). The stock, currently priced at 18.38, recorded a loss of 2.26% in a day and a 3-month decrease of 1.73%. The stock's fair valuation is $61.87, as indicated by its GF Value. However, before rushing to invest, it is crucial to consider certain associated risk factors that suggest VF might be a potential value trap.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. It provides an overview of the fair value at which the stock should be traded. This value is calculated based on historical multiples, GuruFocus adjustment factor, and future estimates of business performance. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Unpacking the Risks: Piotroski F-score and Altman Z-score
Despite its seemingly attractive valuation, certain risk factors associated with VF Corp (VFC, Financial) should not be overlooked. These risks are primarily reflected through its low Piotroski F-score of 2 and Altman Z-score of 1.37. These indicators suggest that VF might be a potential value trap, underlining the importance of thorough due diligence in investment decision-making.
Understanding Piotroski F-score and Altman Z-score
The Piotroski F-score, created by accounting professor Joseph Piotroski, is a tool used to assess the strength of a company's financial health. It is based on nine criteria falling into three categories: profitability, leverage/liquidity/source of funds, and operating efficiency. Higher scores indicate healthier financials. However, VF's current Piotroski F-Score falls in the lower end of this spectrum, indicating potential red flags for investors.
The Altman Z-score, invented by New York University Professor Edward I. Altman, predicts the probability of a company entering bankruptcy within a two-year time frame. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot: VF Corp (VFC, Financial)
VF designs, produces, and distributes branded apparel, footwear, and accessories. Its portfolio includes brands like Vans, The North Face, Timberland, Supreme, and Dickies. It markets its products in the Americas, Europe, and Asia-Pacific through wholesale sales to retailers, e-commerce, and branded stores owned by the company and partners. The company has grown through multiple acquisitions and traces its roots to 1899.
Analysis of VF's Profitability
Examining VF's financial health reveals a concerning decline in its return on assets (ROA) over the past three years. The data indicates a decrease from 7.66% in 2021 to 0.84% in 2023. Such a decrease is concerning, as the Piotroski F-Score penalizes companies with lower current ROA compared to the previous period. This ongoing decline highlights another potential risk associated with investing in VF.
Leverage, Liquidity and Source of Funds: A Worrying Trend
Assessing the aspect of leverage, liquidity, and sources of funds, VF demonstrates an alarming rise in its debt-to-total assets ratio over the past three years. The provided data shows an increase from 0.51 in 2021 to 0.56 in 2023. A higher debt ratio suggests that VF is increasingly financing its assets through debt, thereby escalating its financial risk. The Piotroski F-Score views this as a negative indicator, further cautioning investors about VF.
Operating Efficiency: A Darker Picture
Lastly, concerning operating efficiency, the Piotroski F-score examines changes in gross margin and asset turnover. Regrettably, VF follows a discouraging trajectory with a decrease in gross margin percentage over the past three years, as demonstrated by the data provided: 2021: 53.47; 2022: 54.04; 2023: 52.28 (expressed in percentages). This contraction in gross margin suggests that VF is grappling with either an escalation in the cost of goods sold or dwindling prices - both of which are inauspicious indicators for profitability.
In terms of operational efficiency, another key indicator, VF has unfortunately reported a declining trend in asset turnover over the past three years, as evidenced by the data: 2021: 0.78; 2022: 0.88; 2023: 0.82 (expressed in percentages). Asset turnover measures how effectively a company uses its assets to generate sales, and a decrease in this ratio can indicate a drop in efficiency. This could be due to various factors, such as underutilization of assets or a decline in the market demand for the company's products or services. Consequently, this downward trend in asset turnover implies that VF may need to revisit its operational strategies to improve the utilization of its assets and boost its sales volume.
Conclusion
While the Piotroski F-score is not the only lens through which to view a potential investment, it is a robust and comprehensive tool for evaluating a company's financial health. Unfortunately for VF, its current score suggests potential troubles. Coupled with a low Altman Z-score, these factors suggest that VF Corp (VFC, Financial) might indeed be a value trap. Therefore, potential investors should tread carefully and conduct thorough due diligence before investing.
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GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
