TAM Stock Screener – Undervalued Foot Locker Inc (NYSE: FL)

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One of the cheapest stocks in our Large Cap 1000 Stock Screener is Foot Locker Inc (NYSE: FL).

Foot Locker operates thousands of retail stores throughout the United States, Canada, Europe, Australia, and New Zealand. It also has one franchisee in the Middle East and one in South Korea, each of which operates multiple stores in those regions. The company mainly sells athletically inspired shoes and apparel. Foot Locker’s merchandise comes from only a few suppliers, with Nike providing the majority. Store names include Foot Locker, Champs, and Runners Point. The company also has an e-commerce business selling through Footlocker.com, Eastbay, and Final-Score.

A quick look at Foot Locker’s share price history below over the past twelve months shows that the price is up 4%, but here’s why the company remains undervalued.

(Source: Google Finance)

The following data is from the company’s latest financial statements, dated April 2018.

The company’s latest balance sheet shows that Foot Locker has $1.029 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $125 Million in total debt. Therefore, Foot Locker has a net cash position of $904 Million (cash minus debt).

Financial strength indicators show that the company has a Piotroski F-Score of 5, an Altman Z-Score of 6.34, and a Beneish M-Score of -3.09. All of which illustrate that the company remains financial strong.

If we consider that Foot Locker currently has a market cap of $6.119 Billion, when we subtract the net cash totaling $904 Million that equates to an Enterprise Value of $5.215 Billion.

If we move over to the company’s latest income statements we can see that Foot Locker has $757 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.89, or 6.89 times operating earnings. That places Foot Locker squarely in undervalued territory.

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.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Foot Locker generated trailing twelve month operating cash flow of $1.069 Billion and had $263 Million in Capex. That equates to $806 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 15%. What shouldn’t be overlooked is the fact that the company’s trailing twelve month free cash flow of $806 Million is the highest in the past five years (on an annual basis), due mainly to significant changes in working capital.

In terms of Foot Locker’s annualized Return on Equity (ROE) for the quarter ending April 2018. A quick calculation shows that the company had $2.519 Billion in equity for the quarter ending January 2018 and $2.543 Billion for the quarter ending April 2018. If we divide the combined total of both numbers by two we get $2.531 Billion. If we consider that the company has $269 Million in net income (ttm), that equates to an annualized Return on Equity (ROE) for the quarter ending April 2018 of 11%.

Summary

In summary, Foot Locker is trading on a P/E of 23.9 compared to its 5Y average of 15.55**, and an Acquirer’s Multiple of 6.89, or 6.89 times operating earnings. The company has a strong balance sheet with a net cash position of $904 Million and a cash-to-debt ratio of 8.23.  Financial strength indicators show that Foot Locker is financial sound with a Piotroski F-Score of 5, an Altman Z-Score of 6.34, and a Beneish M-Score of -3.09. The company also generates a FCF/EV Yield of 15% (ttm) and has an annualized return on equity of 11% for the quarter ending April 2018. Lastly, with a buy-back yield of 9% and a dividend yield of 3%, that represents a total shareholder yield of 12%.

(**Source: Morningstar)

Superinvestors Currently Holding Positions In Foot Locker

There are a number of superinvestors currently holding positions in Foot Locker including Ken Griffin, Cliff Asness, Lee Ainslie, Joel Greenblatt, John Rogers, Paul Tudor Jones, and David Dreman.

More About The Large Cap 1000 Stock Screener (19.3%)

From January 2, 1999 to November 29, 2017, the Large Cap Stock Screener generated a total return of 2,797 percent, or a compound growth rate (CAGR) of 19.3 percent per year. This compared favorably with the Russell 1000 Total Return, which returned a cumulative total of 320 percent, or 6.3 percent compound.

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