Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is VF Corp (VFC, Financial). The stock, which is currently priced at 20.46, recorded a gain of 3.54% in a day and a 3-month increase of 22.08%. The stock's fair valuation is $61.86, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- 1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- 2. GuruFocus adjustment factor based on the company's past returns and growth.
- 3. 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. On the other hand, 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 VF should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, Altman Z-score of 1.41, and These indicators suggest that VF, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding the Piotroski F-score and Altman Z-score
The Piotroski F-score, created by accounting professor Joseph Piotroski, is a tool used to assess the strength of a company's financial health. The score is based on nine criteria that fall 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.
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score 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 Snapshot: VF Corp (VFC, Financial)
VF designs, produces, and distributes branded apparel, footwear, and accessories. Its apparel categories are active, outdoor, and work. Its portfolio of about a dozen brands includes 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
Let's delve deeper into VF's financial health by examining the decline in its return on assets (ROA) over the past three years. The data indicates 2021: 7.66; 2022: 7.45; 2023: 0.84, when expressed in percentages. 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.
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 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.
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: 2021: 53.47; 2022: 54.04; 2023: 52.28 (expressed in percentages). 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: 2021: 0.78; 2022: 0.88; 2023: 0.82 (expressed in percentages). 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. [Summerize those cinterning signals]
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, 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 (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: 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
In conclusion, despite VF's seemingly attractive valuation, the company's low Piotroski F-score and Altman Z-score, coupled with declining profitability and operational efficiency, suggest that VF might be a potential value trap. Investors are therefore advised to exercise caution and conduct thorough due diligence before making an investment decision.
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 Screener: Walter Schloss Screen .
