Is Gap (GPS) a Profitable Stock for Value Investors Now?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put The Gap, Inc. GPS stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Gap has a trailing twelve months PE ratio of 8.4, as you can see in the chart below:

 

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.42. If we focus on the long-term PE trend, Gap’s current PE level puts it below its midpoint over the past five years.

 

Further, the stock’s PE compares favorably with the Zacks Retail-Wholesale sector’s trailing twelve months PE ratio, which stands at 28.99. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

 

We should also point out that Gap has a forward PE ratio (price relative to this year’s earnings) of just 10.27, which is tad higher than the current level. So it is fair to expect an increase in the company’s share price in the near term.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Gap has a P/S ratio of about 0.41. This is lower than the S&P 500 average, which comes in at 3.53 right now.  Also, as we can see in the chart below, this is below the highs for this stock in particular over the past few years.

 

If anything, GPS is in the lower end of its range in the time period from a P/S metric, suggesting some level of overvalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, Gap currently has a Zacks Value Score of A, putting it into the top 20% of all stocks we cover from this look. This makes Gap a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Gap is just 1.14, a level that is lower than the industry average of 1.52. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, GPS is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Gap might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of F and a Momentum Score of F. This gives GPS a Zacks VGM score — or its overarching fundamental grade — of D. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been disappointing. The current year has seen three estimates go higher in the past sixty days compared to two lower, while the full year 2020 estimate has seen six downward revision compared to two upward in the same time period.

This has had a negative impact on the consensus estimate though as the current year consensus estimate has declined by 16% in the past two months, while the full year 2020 estimate has decreased by 5.8%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

The Gap, Inc. Price and Consensus

 

The Gap, Inc. Price and Consensus

The Gap, Inc. price-consensus-chart | The Gap, Inc. Quote

Despite the bearish analyst sentiments, the stock holds a Zacks Rank #3 (Hold). Thus, we are looking for in-line performance from the company in the near term.

Bottom Line 

Gap is an inspired choice for value investors, as it is hard to beat its incredible line up of statistics on this front. A strong industry rank (among top 20% of more than 250 industries) further instils our confidence.

However, a Zacks Rank #3 makes it hard to get too excited about this company overall. In fact, over the past two years, the Zacks Retail - Apparel and Shoes industry has clearly underperformed the market at large, as you can see below:

 

So, value investors might want to wait for industry trends to turn favorable in this name first, but once that happens, this stock could be a compelling pick.

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