Value-focused investors continuously seek stocks priced below their intrinsic value. Nordstrom Inc (JWN, Financial) is one such stock that deserves attention. With its current price at 15.37, which recorded a day's loss of 8.62% and a 3-month increase of 2.5%, the stock's fair valuation stands at $23.66 according to its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. It is calculated based on historical multiples, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Nordstrom should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.5. These indicators suggest that Nordstrom, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Demystifying the Altman Z-score
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 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 Snapshot: Nordstrom Inc (JWN, Financial)
Nordstrom is a fashion retailer that operates about 94 department stores and approximately 245 off-price Nordstrom Rack stores. The company also operates both full- and off-price e-commerce sites, two clearance stores, and seven Local locations. Nordstrom's largest merchandise categories are women's apparel (28% of 2022 sales), shoes (26% of 2022 sales), men's apparel (15% of 2022 sales), and women's accessories (13% of 2022 sales). Nordstrom, which traces its history to a shoe store opened in Seattle in 1901, continues to be partially owned and managed by members of the eponymous family.
Unpacking Nordstrom's Low Altman Z-Score
A dissection of Nordstrom's Altman Z-score reveals Nordstrom'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 Nordstrom's historical data, we observe a declining trend in this ratio, indicating Nordstrom'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 Nordstrom's EBIT to Total Assets ratio from historical data indicates a recent dip following an initial rise. This reduction suggests that Nordstrom 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.
Conclusion
Despite its seemingly attractive valuation, Nordstrom Inc (JWN, Financial) might be a potential value trap due to certain risk factors. These risks, reflected through its low Altman Z-score, suggest potential financial distress. Therefore, investors are advised to conduct thorough due diligence before making an investment decision.
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