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 20.61, recorded a gain of 3.15% in a day and a 3-month decrease of 2.6%. The stock's fair valuation is $64.43, 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: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. 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 Overview
VF Corp, with a market cap of $8 billion, designs, produces, and distributes branded apparel, footwear, and accessories. 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.
Observing the financials of VF, it's important 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 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 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: 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.
Conclusion: VF Corp - A Potential Value Trap?
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. This, combined with its low Altman Z-Score, suggests a high probability of financial distress. The declining trends in profitability, liquidity, and operating efficiency further indicate that VF might be a potential value trap. Hence, despite its seemingly attractive valuation, investors are advised to exercise caution and conduct thorough due diligence before considering an investment 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 Screener: Walter Schloss Screen .
