Gap Inc (GPS, Financial) recently showcased a significant daily gain of 30.58%, and an impressive 3-month gain of 78.52%. Despite these gains and an Earnings Per Share (EPS) of $0.29, a critical question arises: Is Gap modestly overvalued? To answer this, we delve into a valuation analysis that will offer insights into the stock's intrinsic value and its alignment with the current market price. Read on to understand the financial nuances that shape Gap's valuation.
Company Introduction
Gap Inc (GPS, Financial), a renowned retailer of apparel, accessories, and personal-care products, operates under the Gap, Old Navy, Banana Republic, and Athleta brands. With a significant portion of sales generated by Old Navy, Gap maintains a robust presence online and through approximately 2,600 stores in North America, Europe, and Asia, supplemented by roughly 850 franchise stores globally. Founded in 1969 and headquartered in San Francisco, Gap's current stock price is juxtaposed against the GF Value, an estimated fair value, prompting an in-depth analysis of the company's true market value.
Summarize GF Value
The GF Value is a proprietary metric that reflects the intrinsic value of a stock, incorporating historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. If Gap's stock price significantly exceeds the GF Value Line, it suggests overvaluation, potentially leading to poorer future returns. Conversely, a price well below the GF Value Line could indicate undervaluation and the prospect of higher future returns.
At a price of $17.85 per share and a market cap of $6.60 billion, Gap (GPS, Financial) appears modestly overvalued according to the GuruFocus Value calculation. This suggests that long-term returns may not align with the company's business growth, as the stock price currently exceeds its estimated fair value.
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Financial Strength
When considering an investment, the financial strength of a company is paramount. Gap's cash-to-debt ratio of 0.24 places it lower than 64.41% of competitors in the Retail - Cyclical industry. With an overall financial strength rating of 5 out of 10, Gap's financial health is deemed fair, highlighting the importance of cautious investment decisions.
Profitability and Growth
Investing in profitable companies, particularly those with consistent long-term profitability, tends to be less risky. Gap has maintained profitability for 8 out of the past 10 years, with an operating margin of 1.67%, ranking below 62.28% of its industry peers. This fair profitability score of 7 out of 10 suggests a solid financial foundation.
However, growth remains a critical valuation component, as it is closely linked to long-term stock performance. Gap's 3-year average annual revenue growth rate of -0.6% and EBITDA growth rate of -24.3% fall short when compared to industry averages, indicating potential concerns for future value creation.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC) can further reveal profitability. Gap's ROIC of 1.57 is significantly lower than its WACC of 7.42, implying that the company is not creating value for shareholders at an optimal rate.
Conclusion
In summary, Gap (GPS, Financial) is currently positioned as modestly overvalued. The company's financial condition and profitability are fair, but its growth prospects are less promising compared to its peers in the Retail - Cyclical industry. For a comprehensive understanding of Gap's financials, consider examining its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
