Value-focused investors are always on the prowl for undervalued stocks, and Nordstrom Inc (JWN, Financial) is one such stock that has caught the eye of many. With a current price of $14.21, Nordstrom recorded a significant daily loss of 4.63% and a three-month decrease of 16.24%. This price point appears even more intriguing when compared to its GF Value of $23.07, suggesting that the stock might be trading below its intrinsic value.
The GF Value is an exclusive metric that represents the intrinsic value of a stock, calculated by considering historical multiples such as PE, PS, PB ratios, and Price-to-Free-Cash-Flow. Adjustments are made based on the company's past performance and growth, as well as future business performance estimates. Ideally, a stock's price will oscillate around the GF Value Line, with prices significantly below suggesting higher future returns. However, this is not a guarantee and warrants a deeper analysis.
Despite Nordstrom's attractive valuation, investors should tread cautiously, as several risk factors loom. The company's low Altman Z-score of 1.47 is particularly concerning, hinting at potential financial distress. Such indicators suggest that Nordstrom, despite its apparent undervaluation, might be ensnaring investors in a value trap, underscoring the importance of thorough due diligence.
Deciphering the Altman Z-score and Its Implications for Nordstrom
The Altman Z-score, a predictive model of bankruptcy risk, combines five financial ratios to produce a score that gauges a company's financial health. A score below 1.8 indicates a high risk of financial distress within two years, while a score above 3 suggests stability. Nordstrom's score of 1.47 rings alarm bells, signifying potential trouble ahead.
Nordstrom's Business Snapshot
Nordstrom is a well-established fashion retailer with a diverse array of stores, including 94 department stores and approximately 250 off-price Nordstrom Rack stores. The company has a rich history dating back to 1901 and has maintained family ownership and management. With a market cap of $2.30 billion and annual sales of $14.80 billion, Nordstrom's financials are substantial, yet its current stock price juxtaposed against the GF Value suggests a disconnect that merits careful consideration.
Breaking Down Nordstrom's Low Altman Z-Score
The ratio of Retained Earnings to Total Assets is telling of a company's ability to reinvest or manage debt. Nordstrom's ratios over the past three years (-0.32 in 2021, -0.28 in 2022, and -0.31 in 2023) suggest a troubling inability to sustainably manage its finances, directly impacting its Z-Score.
Similarly, the EBIT to Total Assets ratio, which measures operational effectiveness, has shown volatility in Nordstrom's case, with a recent dip to 0.02 in 2023 from 0.08 in 2022. This fluctuation indicates potential inefficiencies in asset utilization to generate profits.
Asset turnover, a measure of operational efficiency, has also seen a decline for Nordstrom, from 1.72 in 2022 to 1.65 in 2023. This decrease in asset turnover ratio can suggest a reduction in market demand or suboptimal asset usage, both of which are red flags for investors.
Conclusion: Navigating the Possibility of a Value Trap with Nordstrom
While Nordstrom's current market price might seem like a bargain compared to its GF Value, the low Altman Z-score and other concerning financial ratios paint a picture of a company that could be veering towards financial distress. This analysis serves as a cautionary tale for investors to look beyond surface-level valuations and consider the underlying financial health of a company. Nordstrom, with its current financial indicators, may indeed be a potential value trap, and investors would do well to think twice before taking the plunge.
For GuruFocus Premium members seeking more secure investments, the Walter Schloss Screen can help identify stocks with high Altman Z-Scores, indicating a lower risk of financial distress.
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.
