One of the cheapest stocks in our Large Cap 1000 stock screener is Foot Locker Inc (NYSE:FL).
Foot Locker Inc. (Foot Locker) is a retailer of shoes and apparel. The company operates through two segments: Athletic Stores and Direct-to-Customers. The company is an athletic footwear and apparel retailer, with businesses that include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep and SIX:02.
A quick look at the company’s share price history (below) over the past six months shows that the stock is down 32.55%. Despite the significant drop, Foot Locker remains clearly undervalued, here’s why.
If we start with the company’s latest balance sheet dated April 2017 we can see Foot Locker has cash and cash equivalents of $1.05 Billion and total debt of just $127 million. If we subtract the total debt from the total cash and cash equivalents that leaves $923 million in net cash.
When you consider that the company has a current market cap of $6.4 Billion, that means Foot Locker is currently trading on an Enterprise Value of $5.45 Billion ($6.4 minus $923 million). A quick look at the company’s latest income statement shows that Foot Locker had operating earnings of $978 million (ttm). So that means that the company is currently trading on an Acquirer’s Multiple of 5.57, or 5.57 times operating earnings (ttm).
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
If we move on to the company’s latest cashflow statement we can see that Foot Locker generated $751 million in operating cashflow and had capex of $276 million for the trailing twelve months which means that the company generated $475 million in free cash flow (ttm). With an Enterprise Value of $5.45 Billion and free cashflow of $475 million that means Foot Locker is currently trading on a FCF/EV Yield of 9%.
But what also seems to get overlooked is that Foot Locker also has a buy back yield of 6% and a dividend yield of 2% giving it a total shareholder yield of 8%.
In addition to its strong balance sheet and solid free cashflows if we look at the company’s other financial strength indicators we can see that as of today Foot Locker has a Piotroski F-Score of 8, an Altman Z-Score of 7.98, and a Beneish M-Score of -2.53, so the company remains financially strong.
Furthermore, based on the company’s latest financials Foot Locker has preliminary trailing twelve month revenues of $7.780 Billion, which are slightly higher than the 2017 FY revenues of $7.766 Billion and trailing twelve month net income of $653 million, which is only slightly lower than 2017 FY net income of $664 million. At the same time Foot Locker has maintained its gross margins around historical levels of 34%, operating margins around historical levels of 13%, and net margins around historical levels of 8%.
To summarize, Foot Locker remains clearly undervalued. The company is trading on a P/E of 9.9, a FCF/EV Yield of 9%, and an Acquirer’s Multiple of 5.57, or 5.57 times operating earnings (ttm). Foot Locker has a strong balance sheet and solid free cash flows. The company provides a nice shareholder yield of 8% and has more cash and less debt now when you compare it to previous years while still maintaining its healthy gross, operating, and net margins.
Article by Johnny Hopkins, The Acquirer's Multiple