Discerning value investors are constantly scouting for stocks trading below their intrinsic value. One such stock that has recently piqued interest is VF Corp (VFC, Financial). Currently priced at $19.06, the stock recorded a single-day loss of 1.75% and a three-month dip of 12.54%. However, according to its Fair Value (GF Value), the stock's fair valuation stands at a promising $66.82.
Deciphering the GF Value
The GF Value is a unique calculation that represents the current intrinsic value of a stock. The GF Value Line, visible on our summary page, provides a snapshot of the stock's fair trade value. This value is determined based on historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow), a GuruFocus adjustment factor based on the company's past returns and growth, and future business performance estimates.
However, a deeper analysis is crucial before making an investment decision. Despite VF's seemingly attractive valuation, certain risk factors should not be overlooked. These risks are particularly evident in its low Piotroski F-score of 2 and Altman Z-score of 1.38. These indicators suggest that VF, despite its apparent undervaluation, might be a potential value trap. This complexity underscores the importance of thorough due diligence in investment decision-making.
Understanding Piotroski F-Score and Altman Z-Score
The Piotroski F-score, developed by accounting professor Joseph Piotroski, is a tool used to assess a company's financial health. The score is based on nine criteria divided into three categories: profitability, leverage/liquidity/source of funds, and operating efficiency. The overall score ranges from 0 to 9, with higher scores indicating healthier financials. VF's current Piotroski F-Score, however, falls in the lower end of this spectrum, indicating potential red flags for investors.
On the other hand, the Altman Z-score, invented by New York University Professor Edward I. Altman in 1968, is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Overview: VF Corp (VFC, Financial)
VF Corp (VFC) designs, produces, and distributes branded apparel, footwear, and accessories. Its portfolio includes renowned brands like Vans, The North Face, Timberland, Supreme, and Dickies. VF markets its products in the Americas, Europe, and Asia-Pacific through wholesale sales to retailers, e-commerce, and branded stores owned by the company and partners. The company has grown through multiple acquisitions and traces its roots to 1899.
Analysis of VF's Profitability
Delving deeper into VF's financial health, we observe a decline in its return on assets (ROA) over the past three years. The data indicates 2020: 3.07%; 2021: 7.66%; 2022: 7.45%; 2023: 0.84%. Such a decrease is concerning, as the Piotroski F-Score penalizes companies with lower current ROA compared to the previous period. This ongoing decline highlights another potential risk associated with investing in VF.
Observing VF's financials, it's crucial to note that the cash flow from operations over the trailing twelve months (TTM) stands at $-133.9 million, whereas the net income in the same period is significantly higher at $117.12 million. The Piotroski F-score considers this discrepancy as a potential red flag. The rationale behind this is that a company's operating cash flow is a more direct and less manipulated measure of its cash-generating ability than net income. Net income, while important, is susceptible to accounting treatments and non-cash items which can distort the true cash profitability of the company. If a company consistently shows lower cash flows from operations relative to its net income, it could indicate that the earnings quality is poor and the company might have difficulties sustaining its operations or financing its obligations, a fact which could negatively impact its financial stability and investor confidence.
Leverage, Liquidity and Source of Funds: A Worrying Trend
Assessing the aspect of leverage, liquidity, and sources of funds, VF demonstrates an alarming rise in its debt-to-total assets ratio over the past three years. The provided data shows 2020: 0.54; 2021: 0.51; 2022: 0.48; 2023: 0.56, expressed as percentages. A higher debt ratio suggests that VF is increasingly financing its assets through debt, thereby escalating its financial risk. The Piotroski F-Score views this as a negative indicator, further cautioning investors about VF.
Examining VF's financial stability, there's a notable decrease in its current ratio over the past three years, as shown by the data 2020: 3.65; 2021: 1.49; 2022: 1.33; 2023: 1.37, which is expressed as percentages. The current ratio is a key indicator of a company's short-term financial health, as it gauges the ability to cover short-term liabilities with short-term assets. A declining current ratio suggests that VF's liquidity and capability to manage immediate financial obligations are deteriorating.
Operating Efficiency: A Darker Picture
Lastly, concerning operating efficiency, the Piotroski F-score examines changes in gross margin and asset turnover. Regrettably, VF follows a discouraging trajectory with a decrease in gross margin percentage over the past three years, as demonstrated by the data provided: 2020: 54.79%; 2021: 53.47%; 2022: 54.04%; 2023: 52.28%. This contraction in gross margin suggests that VF is grappling with either an escalation in the cost of goods sold or dwindling prices - both of which are inauspicious indicators for profitability.
In terms of operational efficiency, another key indicator, VF has unfortunately reported a declining trend in asset turnover over the past three years, as evidenced by the data: 2020: 0.85; 2021: 0.78; 2022: 0.88; 2023: 0.82. Asset turnover measures how effectively a company uses its assets to generate sales, and a decrease in this ratio can indicate a drop in efficiency. This could be due to various factors, such as underutilization of assets or a decline in the market demand for the company's products or services. Consequently, this downward trend in asset turnover implies that VF may need to revisit its operational strategies to improve the utilization of its assets and boost its sales volume.
While the Piotroski F-score is not the only lens through which to view a potential investment, it is a robust and comprehensive tool for evaluating a company's financial health. Unfortunately for VF, its current score suggests potential troubles.
VF's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of VF's Altman Z-score reveals VF's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating VF's historical data, 2020: -0.02; 2021: 0.02; 2022: 0.01; 2023: 0.00, we observe a recent decline following an initial increase in this ratio. This downward movement indicates VF's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of VF's EBIT to Total Assets ratio from historical data (2020: 0.03; 2021: 0.08; 2022: 0.11; 2023: 0.02) indicates a descending trend. This reduction suggests that VF might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
When it comes to operational efficiency, a vital indicator for VF is its asset turnover. The data: 2020: 0.85; 2021: 0.78; 2022: 0.88; 2023: 0.82 from the past three years suggests a decreasing trend in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in VF's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion: VF Corp (VFC, Financial) - A Potential Value Trap
Despite its seemingly attractive valuation, the combination of a low Piotroski F-score and a low Altman Z-score suggests that VF Corp (VFC) may be a potential value trap. The company's declining ROA, increasing debt ratio, and decreasing gross margin and asset turnover all signal potential financial distress. Therefore, investors are advised to exercise caution before investing in VF.
GuruFocus Premium members can find stocks with high Piotroski F-score using the following Screener: Piotroski F-score screener .GuruFocus Premium members can find stocks with high Altman Z-Score using the following
