Gap Inc (GPS, Financial) has recently experienced a daily loss of 5.67%, yet it's important to note that over the last three months, the stock has gained 5.36%. With an Earnings Per Share (EPS) of $1.34, investors are left pondering whether Gap (GPS) is significantly overvalued. To uncover the truth behind its valuation, we delve into a detailed analysis that will shed light on the intrinsic value of Gap's stock.
Company Overview
Gap Inc (GPS, Financial) is a leading global retailer offering clothing, accessories, and personal care products under renowned brands such as Gap, Old Navy, Banana Republic, and Athleta. With Old Navy as its flagship brand, Gap has established a strong presence with approximately 2,600 stores across North America, Europe, and Asia, and franchises exceeding 900 stores globally. Founded in 1969 and headquartered in San Francisco, Gap's market capitalization stands at $7.70 billion, supported by sales of $14.90 billion. As we compare Gap's current stock price of $20.64 to its GF Value of $12.71, a significant overvaluation becomes apparent, prompting a closer examination of its fair market value.
Understanding the GF Value
The GF Value is a unique valuation metric that estimates the intrinsic value of a stock by considering historical trading multiples, a GuruFocus adjustment factor based on past performance, and projected future business performance. The GF Value Line, a visual representation of this fair value estimate, suggests that Gap's stock is currently trading well above its intrinsic value. This overvaluation indicates that the stock's future returns could be disappointing compared to its business growth.
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Financial Strength
Investing in companies with robust financial strength is vital to mitigate the risk of capital loss. Gap's cash-to-debt ratio of 0.34 positions it below 56.62% of its peers in the Retail - Cyclical industry. This finding leads GuruFocus to assign Gap a financial strength rating of 6 out of 10, indicating a fair balance sheet.
Profitability and Growth
Gap's track record of profitability over the past decade underlines its investment appeal. With annual revenues of $14.90 billion and an operating margin of 3.76%, Gap ranks in the upper half of its industry. Its profitability score of 7 out of 10 reflects this fair performance. However, Gap's revenue growth rate of -0.6% places it below two-thirds of its industry counterparts, highlighting an area of concern for potential growth.
ROIC vs. WACC
Comparing Return on Invested Capital (ROIC) to the Weighted Average Cost of Capital (WACC) provides insight into a company's profitability relative to its capital costs. Gap's ROIC of 6.48 is lower than its WACC of 11.55, suggesting that the company may not be generating adequate returns on its investments.
Conclusion
In summary, Gap (GPS, Financial) appears to be significantly overvalued when considering its market price in relation to its GF Value. The company maintains fair financial health and profitability, but its growth prospects are less promising when compared to industry peers. For a deeper dive into Gap's financials, interested investors can explore its 30-Year Financials here.
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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.
