GPS Investment Analysis Report & Stock Research, The Gap, Inc.

Ockham's Rating/Recommendation Summary

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GPS Revenue

As a value investing shop, we are interested in seeing how GPS's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 1.22x and the low end of the range at 0.70x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for GPS of 0.98x is above its historical average only slightly. So, while not a major concern it is worth noting that from a value perspective GPS does not look undervalued on a Price to Sales basis. However, were the Price to Sales ratio to drop by 1% (the historical average) then we would become more positive on this stock.

GPS Cash Earnings

As the old saying goes, "Cash is King!" We look at reported Cash Earnings, but the main emphasis of our analysis involves stripping out non-cash events such as depreciation from our cash earnings analysis. This helps us view the cash flows more clearly. Nevertheless, an analysis of Cash Earnings (both reported and otherwise) is absolutely pivotal to assessing a company's value, and currently GPS is below its historical average multiple of cash earnings as calculated by Ockham. Similar to our analysis of sales per share, Ockham looks at the last 10 years of cash earnings levels for GPS to identify where the current high and low price levels have been historically in relation to profit per share. Again, we utilize a weighted average methodology which relies more heavily on recent years of data. This weighted average framework provides us with an average high Price to Cash Earnings ratio per share of 12.48 and a 7.27 low over the same period.

At its current price of $19.88, the Price to Cash Earnings ratio of 8.72 per share for GPS is relatively attractive. At current profitability levels, a drop in share price would only improve our future expectations. Again, Cash Earnings is an incredibly valuable metric, and management at GPS must continue on its generation to improve our overall outlook for the stock.

GPS Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In GPS’s case, the estimated annual dividend is $0.34 resulting in a current dividend yield of 1.71%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from GPS against the historic high and low levels over the past 10 years. The highest dividend yield from GPS over this period was 3.62% while the lowest dividend yield was 0.35% Management at GPS needs to get the current dividend yield above the historical median before we are comfortable from this point of view.