With a daily loss of -5.11%, a 3-month gain of 15.42%, and an Earnings Per Share (EPS) of 3.16, Bath & Body Works Inc (BBWI, Financial) presents a compelling case for value investors. This article seeks to answer whether the stock is significantly undervalued. Read on for an in-depth valuation analysis.
Company Introduction
Bath & Body Works Inc (BBWI, Financial) is a specialty home fragrance and fragrant body care retailer operating under the Bath & Body Works, C.O. Bigelow, and White Barn brands. The majority of its business is generated in North America, with less than 5% of sales from international markets in fiscal 2022. The company's growth is expected from store reformatting, digital and international channels, as well as new category expansion.
At a current price of $36.99 per share, Bath & Body Works (BBWI, Financial) has a market cap of $8.50 billion. However, the GF Value, an estimation of the fair value, stands at $55.95, suggesting that the stock might be significantly undervalued.
Understanding GF Value
The GF Value is a proprietary measure that provides an overview of a stock's fair trading value. It takes into account historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates.
If a stock's price is significantly above the GF Value Line, it may be overvalued, and its future return could be poor. Conversely, if it is substantially below the GF Value Line, the stock may be undervalued, and its future return could be higher.
Considering these factors, Bath & Body Works appears to be significantly undervalued. As such, the long-term return of its stock is likely to be much higher than its business growth.
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Financial Strength
Investing in companies with poor financial strength can lead to a higher risk of permanent loss of capital. Therefore, it's crucial to review a company's financial strength before deciding to buy its stock. Bath & Body Works has a cash-to-debt ratio of 0.18, which is worse than 71.32% of companies in the Retail - Cyclical industry. GuruFocus ranks the overall financial strength of Bath & Body Works at 4 out of 10, indicating that its financial strength is poor.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. Bath & Body Works has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $7.50 billion and Earnings Per Share (EPS) of $3.16. Its operating margin is 17.01%, which ranks better than 90.68% of companies in the Retail - Cyclical industry. Overall, GuruFocus ranks the profitability of Bath & Body Works at 8 out of 10, indicating strong profitability.
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 Bath & Body Works is18.6%, which ranks better than 79.92% of companies in the Retail - Cyclical industry. The 3-year average EBITDA growth is 7.1%, which ranks worse than 52.27% of companies in the Retail - Cyclical industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate a company's profitability. The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Bath & Body Works's ROIC is 27.45 while its WACC came in at 9.43.
Conclusion
Overall, Bath & Body Works stock is believed to be significantly undervalued. The company's financial condition is poor, but its profitability is strong. Its growth ranks worse than 52.27% of companies in the Retail - Cyclical industry. To learn more about Bath & Body Works stock, you can check out its 30-Year Financials here.
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