Foot locker is undervalued with growth potential
Atualizado
Key takeaways:
- Undervalued at the moment.
- Analysts growth estimates at 39% over the next 5 years.
- Aggressive share buy back by the company over the last 5 years. According to Gurufocus, FL's 3 year share buyback ratio is higher than 98% of companies in the retail/cyclical industry.
- Dividend stock. (I am not dividend focused, as I believe more money can be made in capital appreciation, having said that, dividends are like the icing on the cake on an undervalued company where growth is expected.)
The Bear argument:
- An argument for stagnant growth is that foot locker has lagged the industry in moving their online e-commerce presence.
- A concern I found is that the total equity growth rate had been stagnant over the last 5 years with an overall growth of 1%. Although, aggressive share buyback may cause this to happen.
Fundamentals:
PE ratio: 5.16 (significantly lower than others)
"The current S&P500 10-year P/E Ratio is 38.0. This is 90% above the modern-era market average of 19.6, putting the current P/E 2.3 standard deviations above the modern-era average. This suggests that the market is Strongly Overvalued." (currentmarketvaluation.com)
Div yield 2.85%
In the last set of earnings:
Total assets at 8.2 billion up from 7 billion.
Total current liabilities sitting at 1.7 billion
Total liabilities at 4.8 over 4.3
FL's total revenue has been growing since 2005 and is sitting at an all time high for 2021. The company is producing more revenue, however, the stock price is not reflecting that, as the stock price was higher at period of time where revenue was lower.
In 2011 the company had 155.7 million shares outstanding, today, the company only has 104 million shares outstanding.
Valuation:
Trailing 12 month earnings per share (TTM EPS)
8.71
Estimated growth rates
The estimated analyst growth rate for FL is 39.21% which is extremly significant.
The total equity growth rate over the last 5 years was 1%, likely due to share buy back.
I decided to use an estimated growth rate of 12% which is very conservative compared to analysts, in order to leave toom for error.
Future P/E value
To estimate the future PE value (what investors are willing to pay) I will take the average
of the high and low PE ratio over the last 5 years.
High: 16.16
low: 8.40
Average: 24.56
What will the EPS be in 5 years?
(1+growth rate)^5 x TTMEPS
1.762 x 8.71
= 15.3
What will the future value of shares be =
5 year EPS = 15.3
15.3 x Future PE ratio =
15.3 x 24.56= 375$
At current growth rate, $375 is an estimated 5 year share price.
At a 15% annual return, I am looking to double my money every 5 years.
This puts the fair value for FL at this moment at 375/2
= $187
Whereas the stock is trading at $45 at the moment, it accounts for being undervalued, and also presenting a desirable margin of safety.
Analyst reports:
The average Foot Locker price target is $63.36 which implies over 42% upside potential.
Desired ROI:
At this time, the share price seems to have the support of being undervalued with room to run.
A risk in this trade is stagnation, otherwise, the share price may move sideways over long periods of time.
Whereas the share price fluctuates, even for lengthy periods of time AND whereas the fundamentals are not changed, or are improving, AND whereas there is a dividend being paid out during the holding period. The stock is justified as a strategy to store money with lesser exposure to risk, compared to the rest of the market where stocks are overpriced.
It is like putting money into savings, without the undue risk of losing the money. And also enjoying the Dividend payouts as well.
If I were to take the previous ATH as a price target. I would be looking at an over all return of just about 45%.
At a return of 15% per year, which is quiet desirable, this trade is justified as a holding position for 3 years, where as price levels of $40 or lower, without changes in fundamentals make the trade worthy.
This research was inspired by Daniel Pronk on Youtube, see his video here:
youtube.com/watch?v=MKpdxSOSyFw&lc=Ugx_JcDYyXDI4oaiFGV4AaABAg.9XLTSHRgkCo9XN080Tfj2w&ab_channel=DanielPronk
resources:
currentmarketvaluation.com/models/price-earnings.php
- Undervalued at the moment.
- Analysts growth estimates at 39% over the next 5 years.
- Aggressive share buy back by the company over the last 5 years. According to Gurufocus, FL's 3 year share buyback ratio is higher than 98% of companies in the retail/cyclical industry.
- Dividend stock. (I am not dividend focused, as I believe more money can be made in capital appreciation, having said that, dividends are like the icing on the cake on an undervalued company where growth is expected.)
The Bear argument:
- An argument for stagnant growth is that foot locker has lagged the industry in moving their online e-commerce presence.
- A concern I found is that the total equity growth rate had been stagnant over the last 5 years with an overall growth of 1%. Although, aggressive share buyback may cause this to happen.
Fundamentals:
PE ratio: 5.16 (significantly lower than others)
"The current S&P500 10-year P/E Ratio is 38.0. This is 90% above the modern-era market average of 19.6, putting the current P/E 2.3 standard deviations above the modern-era average. This suggests that the market is Strongly Overvalued." (currentmarketvaluation.com)
Div yield 2.85%
In the last set of earnings:
Total assets at 8.2 billion up from 7 billion.
Total current liabilities sitting at 1.7 billion
Total liabilities at 4.8 over 4.3
FL's total revenue has been growing since 2005 and is sitting at an all time high for 2021. The company is producing more revenue, however, the stock price is not reflecting that, as the stock price was higher at period of time where revenue was lower.
In 2011 the company had 155.7 million shares outstanding, today, the company only has 104 million shares outstanding.
Valuation:
Trailing 12 month earnings per share (TTM EPS)
8.71
Estimated growth rates
The estimated analyst growth rate for FL is 39.21% which is extremly significant.
The total equity growth rate over the last 5 years was 1%, likely due to share buy back.
I decided to use an estimated growth rate of 12% which is very conservative compared to analysts, in order to leave toom for error.
Future P/E value
To estimate the future PE value (what investors are willing to pay) I will take the average
of the high and low PE ratio over the last 5 years.
High: 16.16
low: 8.40
Average: 24.56
What will the EPS be in 5 years?
(1+growth rate)^5 x TTMEPS
1.762 x 8.71
= 15.3
What will the future value of shares be =
5 year EPS = 15.3
15.3 x Future PE ratio =
15.3 x 24.56= 375$
At current growth rate, $375 is an estimated 5 year share price.
At a 15% annual return, I am looking to double my money every 5 years.
This puts the fair value for FL at this moment at 375/2
= $187
Whereas the stock is trading at $45 at the moment, it accounts for being undervalued, and also presenting a desirable margin of safety.
Analyst reports:
The average Foot Locker price target is $63.36 which implies over 42% upside potential.
Desired ROI:
At this time, the share price seems to have the support of being undervalued with room to run.
A risk in this trade is stagnation, otherwise, the share price may move sideways over long periods of time.
Whereas the share price fluctuates, even for lengthy periods of time AND whereas the fundamentals are not changed, or are improving, AND whereas there is a dividend being paid out during the holding period. The stock is justified as a strategy to store money with lesser exposure to risk, compared to the rest of the market where stocks are overpriced.
It is like putting money into savings, without the undue risk of losing the money. And also enjoying the Dividend payouts as well.
If I were to take the previous ATH as a price target. I would be looking at an over all return of just about 45%.
At a return of 15% per year, which is quiet desirable, this trade is justified as a holding position for 3 years, where as price levels of $40 or lower, without changes in fundamentals make the trade worthy.
This research was inspired by Daniel Pronk on Youtube, see his video here:
youtube.com/watch?v=MKpdxSOSyFw&lc=Ugx_JcDYyXDI4oaiFGV4AaABAg.9XLTSHRgkCo9XN080Tfj2w&ab_channel=DanielPronk
resources:
currentmarketvaluation.com/models/price-earnings.php
Nota
Note - I made a mistake in the valuation section aboveI had not averaged out the PE rations properly.
187.84 is the estimated 5 year share price
$93 is the present time fair value.
Aviso legal
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