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L Brands, Inc. (NYSE-LTD) Potentially Over-Valued In The Market

|Includes: L Brands, Inc. (LB)

Owner of the Victoria's Secret brand of intimate apparel and swimwear, the name of the company was just recently changed to L Brands, Inc. (LTD-NYSE). The company's most important quarter is November-December-January, but intimate apparel sales tend to cool down by February, and then heat up again somewhat in the Summer months.

Despite brand loyalty and the value of its franchise, I believe this stock could be over-valued in the market, based on the following:

My earnings per share estimates are $3.14E and $3.28E for its fiscal years ending in January 2014 and January 2015, respectively, or a less than impressive projected increase of about 4.3%E. I derived this growth estimate as follows: Revenues increased at an average annual rate of about 4.3%, from about $9613 million for its fiscal year ended February 1, 2011, to about $10459 million for its fiscal year ended January 28, 2013. (E is for Estimate.)

If you add up the company's operating cash flow for the last four quarters, and then subtract its capital spending for the same period, you could estimate a net cash flow number of about $2.85E per share, on about 288 million shares outstanding.

Since Yahoo Finance shows a beta of about 1.0 for L Brands, the expected rate of return on the stock market overall, as represented by the S&P 500 SPDR, would be the same as the return that the market expects for L Brands, Inc.

Using the Dividend Discount Model and plugging in the company's cash flow estimate, you would then divide my $2.85E cash flow estimate by the difference between the stock's estimated return, 13.74%E, and my growth estimate of 4.3%E. (Used as a proxy for market expectations, the S&P 500 SPDR (NYSEARCA:SPY) generated a trailing twelve months total return of about 13.74%, from Yahoo Finance.)

The result of this analysis would be an estimated target stock price of about $30E per share. At present, the stock is trading at about $50.

Notwithstanding its relatively low revenue growth rate of the last two years combined with its negative shareholders equity, its price/earnings ratio, currently about 20.7X, substantially exceeds the market price/earnings ratio, currently about 18.8X. This would tend to indicate that L Brands could be over-valued in the market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.