- By GF Value
The stock of Abercrombie & Fitch Co (NYSE:ANF, 30-year Financials) gives every indication 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 $35.17 per share and the market cap of $2.2 billion, Abercrombie & Fitch Co stock gives every indication of being significantly overvalued. GF Value for Abercrombie & Fitch Co is shown in the chart below.
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ANF 15-Year Financial Data
The intrinsic value of ANF
Peter Lynch Chart of ANF
Because Abercrombie & Fitch Co 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 0.33% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Abercrombie & Fitch Co has a cash-to-debt ratio of 0.71, which which ranks in the middle range of the companies in the industry of Retail - Cyclical. The overall financial strength of Abercrombie & Fitch Co is 5 out of 10, which indicates that the financial strength of Abercrombie & Fitch Co is fair. This is the debt and cash of Abercrombie & Fitch Co over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Abercrombie & Fitch Co has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $3.1 billion and loss of $1.88 a share. Its operating margin of 1.82% in the middle range of the companies in the industry of Retail - Cyclical. Overall, GuruFocus ranks Abercrombie & Fitch Co's profitability as fair. This is the revenue and net income of Abercrombie & Fitch Co 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 Abercrombie & Fitch Co is -0.2%, which ranks in the middle range of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth is -15.3%, which ranks worse than 80% of the companies in the industry of Retail - Cyclical.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Abercrombie & Fitch Co's return on invested capital is 5.67, and its cost of capital is 8.95. The historical ROIC vs WACC comparison of Abercrombie & Fitch Co is shown below:
In conclusion, Abercrombie & Fitch Co (NYSE:ANF, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 80% of the companies in the industry of Retail - Cyclical. To learn more about Abercrombie & Fitch Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.