V.F. Corporation (NYSE:VFC) presents an intriguing investment possibility for value investors, as the company has maintained fairly 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 VF Corporation 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.
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
|Value Based on 3% Growth||$37.58|
|Value Based on 0% Growth||$22.03|
|Market Implied Growth Rate||10.07%|
Balance Sheet - September 2014
Earnings Per Share
Earnings Per Share - ModernGraham
VFC Dividend data by YCharts
VF Corporation performs well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor, on the other hand, is concerned with the low current ratio in combination with the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. 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 $1.23 in 2010 to an estimated $2.59 for 2014. This is a fairly strong level of demonstrated growth which is well above the market's implied estimate of 10.07% earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 22% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and caps the growth estimate at 15%. 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 VF Corporation for more perspective!
This article was written by
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.