Novice Investing - A Small Gap In Price

Date: Sunday 20th 2008f July 2008 12:38:15 PM

A Small Gap In Price - 05/17/2007

By: Hari Wibowo

If you look at Gap Inc. (GPS), you wouldn't believe that this is the largest company in apparel stores industry. The Gap operates apparel stores under the brand the Gap, Old Navy, Banana Republic, Piperlime to name a few. Gap boasts a total stores of 3131 stores around the developed countries. For the past four years, Gap stock had been as stagnant as stodgy utility, bouncing back and forth between $15 to $ 25 per share. It is currently trading at $ 18 per share. Contrast that with Gap's smaller competitors. If you believe that rising tides will lift all boats, you would be surprised to see that they are Gap's direct competitors. Take a look at the graph below.

Company	4 Year Stock Performance	Market Capitalization
Guess? Inc. (GES)	+ 1860%	$ 3.78 Billion
American Eagle (AEOS)	+ 479%	$ 6.27 Billion
Bebe Stores (BEBE)	+ 337%	$ 1.64 Billion
Polo Ralph Lauren (RL)	+ 330%	$ 9.74 Billion
Abercrombie (ANF)	+ 280%	$ 6.98 Billion
Limited Brands (LTD)	+ 114%	$ 10.21 Billion

Where is Gap in the equation? Gap returns less than 50% if you manage to buy at the lows. You can check the figures by yourself. Is there something terribly wrong with Gap's business? Yes, growth has slowed. But, Gap EPS had never been impressive on the first place. For the past five years, Gap earning had risen 100% to around $ 1.00 per share. Meanwhile Guess? Inc. (GES) for example, had risen earning by 570% during the same period. No wonder Guess is doing better.

The question is why isn't Gap shares doing better? This again goes back to the concept of fair value. If Gap shares was overvalued back then, despite the 100% increase in earnings, its shares won't move much. Case in point is shares of Walmart Stores (WMT) where earning had increased from $ 1.44 per share in 2002 to $ 2.92 currently. (103% increase). Meanwhile, Walmart shares decrease 13% during the same period.

Not all is negative for Gap. Back in 2002, Gap spotted a negative net cash of $ 900 Million. As of February 2007, Gap spotted $ 2.4 Billion of positive net cash. This is mainly due to the decrease of long term debt from $ 1.96 Billion initially to $ 188 Milion now. Thus, despite the stagnant stock price, Gap had actually strengthened its balance sheet as a result of its profitable operations. Don't get too excited about Gap yet. At current price of $ 18 per share and expected EPS of $ 0.87 per share, Gap is about fairly valued. If price dips down to below $ 15 per share, you may consider Gap as possible investment as it has a decent positive net cash on its balance sheet now.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Gap Inc. (GPS) or any other securities.

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