The stock of L Brands (NYSE:LB, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $65.79 per share and the market cap of $18.2 billion, L Brands stock appears to be significantly overvalued. GF Value for L Brands is shown in the chart below.
Because L Brands is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 2.92% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. L Brands has a cash-to-debt ratio of 0.34, which is in the middle range of the companies in the industry of Retail - Cyclical. The overall financial strength of L Brands is 4 out of 10, which indicates that the financial strength of L Brands is poor. This is the debt and cash of L Brands over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. L Brands has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $13.2 billion and earnings of $4.99 a share. Its operating margin is 18.69%, which ranks better than 93% of the companies in the industry of Retail - Cyclical. Overall, GuruFocus ranks the profitability of L Brands at 7 out of 10, which indicates fair profitability. This is the revenue and net income of L Brands over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of L Brands is -1.4%, which ranks in the middle range of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth is -2.9%, which ranks in the middle range of the companies in the industry of Retail - Cyclical.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, L Brands's ROIC is 26.28 while its WACC came in at 10.56. The historical ROIC vs WACC comparison of L Brands is shown below:
In conclusion, the stock of L Brands (NYSE:LB, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Retail - Cyclical. To learn more about L Brands stock, you can check out its 30-year Financials here.
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