Gap Inc (GPS, Financial) experienced a daily loss of -5.54%, with a 3-month gain of 13.06%. The company's Earnings Per Share (EPS) stands at 0.29. But the question remains: is Gap (GPS) modestly undervalued? This article provides an in-depth valuation analysis of Gap, encouraging readers to delve into the company's financials and market position.
Company Overview
Gap retails apparel, accessories, and personal-care products under various brands, including Gap, Old Navy, Banana Republic, and Athleta. Old Navy contributes to more than half of Gap's sales. The firm operates approximately 2,600 stores in North America, Europe, and Asia, with about 850 more franchised in various regions. Founded in 1969, Gap is based in San Francisco. The company's stock price currently stands at $10.58, with a market cap of $3.90 billion. When compared to the GF Value of $13.97, Gap appears to be modestly undervalued.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, derived from historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the stock's fair trading value. If the stock price significantly deviates from the GF Value Line, it may be overvalued or undervalued, affecting its future returns.
Based on GuruFocus' valuation method, Gap (GPS, Financial) appears to be modestly undervalued. The GF Value estimates the stock's fair value at $13.97. At its current price of $10.58 per share, Gap seems to be modestly undervalued, suggesting that its long-term return is likely to be higher than its business growth.
Gap's Financial Strength
Investing in companies with poor financial strength can lead to a higher risk of permanent capital loss. Therefore, it's crucial to review a company's financial strength before investing. A good starting point is the cash-to-debt ratio. Gap's cash-to-debt ratio is 0.24, ranking lower than 63.91% of 1100 companies in the Retail - Cyclical industry. GuruFocus ranks Gap's overall financial strength at 5 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies carries less risk, especially for those demonstrating consistent profitability over the long term. Gap has been profitable 8 years over the past 10 years, with revenues of $15.10 billion and Earnings Per Share (EPS) of $0.29 in the past 12 months. However, its operating margin of 1.67% ranks lower than 61.36% of 1105 companies in the Retail - Cyclical industry. Overall, GuruFocus ranks Gap's profitability as fair.
Growth is a crucial factor in a company's valuation. A faster-growing company creates more value for shareholders, especially if the growth is profitable. However, Gap's growth ranks lower than 90.51% of 896 companies in the Retail - Cyclical industry, with a 3-year average annual revenue growth of -0.6% and a 3-year average EBITDA growth rate of -24.3%.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) and Weighted Average Cost of Capital (WACC) provides a measure of its profitability. For the past 12 months, Gap's ROIC stands at 1.57, while its WACC is 6.99.
Conclusion
In conclusion, Gap (GPS, Financial) appears to be modestly undervalued. The company's financial condition and profitability are fair, but its growth ranks lower than 90.51% of 896 companies in the Retail - Cyclical industry. To learn more about Gap stock, check out its 30-Year Financials here.
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