Fossil Group Inc. (NASDAQ:FOSL) presents an intriguing investment possibility for value investors, as the company has demonstrated very strong earnings growth over the last few years that may not be properly priced into the market price. Benjamin Graham, the father of value investing, taught that looking at the price cannot be the sole factor in investment decisions, as the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how Fossil Group fares in the ModernGraham valuation model.
The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.
In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved 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.
FOSL data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7
- 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 (price over normalized earnings) ratio - PEmg is less than 20 - PASS
- 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
Valuation Summary
Key Data:
Recent Price | $106.92 |
MG Value | $235.36 |
MG Opinion | Undervalued |
Value Based on 3% Growth | $88.64 |
Value Based on 0% Growth | $51.96 |
Market Implied Growth Rate | 4.49% |
Net Current Asset Value (NCAV) | $3.97 |
PEmg | 17.49 |
Current Ratio | 3.03 |
PB Ratio | 5.94 |
Balance Sheet - September 2014
Current Assets | $1,495,000,000 |
Current Liabilities | $493,000,000 |
Total Debt | $608,000,000 |
Total Assets | $2,237,000,000 |
Intangible Assets | $313,000,000 |
Total Liabilities | $1,285,000,000 |
Outstanding Shares | 52,900,000 |
Earnings Per Share
2014 (estimate) | $7.14 |
2013 | $6.56 |
2012 | $5.59 |
2011 | $4.61 |
2010 | $3.77 |
2009 | $2.07 |
2008 | $2.02 |
2007 | $1.75 |
2006 | $1.13 |
2005 | $1.07 |
2004 | $1.23 |
Earnings Per Share - ModernGraham
2014 (estimate) | $6.11 |
2013 | $5.24 |
2012 | $4.26 |
2011 | $3.34 |
2010 | $2.52 |
2009 | $1.80 |
Dividend History
Fossil Group does not pay a dividend.
Conclusion:
Fossil Group performs quite well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the lack of dividends and the high PB ratio, while the Enterprising Investor is only concerned by the lack of dividends. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
When it comes to that valuation, it is critical to consider the company's earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $2.52 in 2010 to an estimated $6.11 for 2014. This is a very strong level of demonstrated growth which is well above the market's implied estimate 4.49% annual earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 28.5% per year, which is clearly unsustainable over a long period of time. As a result, the ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur. The ModernGraham estimate is capped at 15% annual growth, which is still significantly higher than the market estimate. A significant slowdown would have to occur to justify a price as low as the market is demonstrating. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.
Be sure to check out previous ModernGraham valuations of Fossil Group for a greater perspective!