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The Gap Valuation

2-28-2016 Current share price:  $27.23

The Gap is an apparel company. The Company sells apparel, accessories, and personal care products.  They own the following brands: Gap, Banana Republic, Old Navy, Piperlime, Athleta and Intermix. The Gap is a global brand with presence in the United States, Canada, Japan, Asia, Australia, Europe, Latin America, the Middle East and Africa.

The simplest valuation is to compare Analyst Target to the current price.  The analyst target is 3% below the current price.  This suggests limited Upside Potential remaining.

Graham Value
The next simplest measures are Graham valuations.  4 variations are used using different time tables for calculating EPS and EPS growth.  These numbers reflect the impressive growth rates that GPS has had over the last ten years.  Leverage has increased substantially over that time so to use this methodology accurately the numbers would have to be corrected for the increased leverage.

Relative Value
Relative valuations are based upon historic multiples.  For large cap companies, such as the GAP, buying at multiples less than the historic values represent a good value.  Based on historic multiples the gap is in the appropriate price range. Key ratios range from saying the stock is 16% overvalued to 23% undervalued.

Intrinsic Value
Intrinsic valuations include discounted cash flow (DCF), dividend discount model (DDM), and Earnings Power Value  (EPV).  The DCF model values the GAP at $42.86, suggesting considerable Upside potential.  EPV values GPS at $28.38 implying a low upside potential based on the current share price.  The dividend growth model, DDM, values the GAP at $27.32 which is within 10 cents of the current share price.  

Technical Indicators
Simple Moving Average 
GPS is trading above its 13 day simple moving average which is the sign of a Bullish trend. The SMA is risingwhich emphasizes the strength of the bullish trend.
The MACD is above the 9-day moving average and has a value above 0 which are both bullish signs.
On Balance Volume
The On Balance Volume indicator has a positive slope indicating considerable buying interest.

The GAP (GPS) currently presents a value opportunity to investors and deserves in-depth modeling and research.  Dividend growth investors have created a near term floor just below the current share price Limiting Downside Risk.  DCF and EPV models both value GPS at having considerable upside from the current share price.  The limited downside and potential large upside create an attractive risk/reward ratio.  

Technical indicators suggest bullish momentum.  This may present an opportunity to momentum trade the stock knowing that the dividend places the floor close to the current share Price Limiting Downside risk.  

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

This website expresses my own opinion.   I am not a financial advisor.  All opinions, research, analyses, and other information provided on this website are provided as general market commentary and do not constitute investment advice.

This post first appeared on Simple Stock Valuation, please read the originial post: here

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The Gap Valuation


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