Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Urban Outfitters Inc. fares in the ModernGraham valuation model.
URBN data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - FAIL
- Earnings growth - EPSmg greater than 5 years ago - PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$22.89|
|Value Based on 0% Growth||$13.42|
|Market Implied Growth Rate||7.61%|
Balance Sheet - 10/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
Urban Outfitters Inc. appears suitable for the Enterprising Investor but not the Defensive Investor, due to the lack of dividend payments and high PEmg and PB ratios. The Enterprising Investor is not quite as strict as the Defensive Investor, due to the Enterprising Investor's willingness to undergo extensive analysis, and the only initial drawback of the company for the Enterprising Investor is the lack of dividend payments. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable conducting further research into this company, including a review into other opportunities such as by reading ModernGraham's valuation of The Gap Inc. (NYSE:GPS) and a list of 5 Low PEmg Companies for the Enterprising Investor.
From a valuation perspective, the company appears to be fairly valued at the present time. The company has grown its EPSmg (normalized earnings) from $1.07 in 2010 to an estimated $1.58 for 2014, a level of growth that supports the market's implied estimate of earnings growth of 7.61%. The ModernGraham valuation model accordingly returns an estimate of intrinsic value that falls within a safety margin in relation to the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Urban Outfitters Inc.? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Urban Outfitters Inc. (NASDAQ:URBN) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.