Is Gap (GPS) A Great Stock For Value Investors?

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. (NYSE: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 16.1, 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 20.8x. If we focus on the long-term PE trend, Gap’s current PE level puts it above its midpoint over the past five years, with the number having risen rapidly over the past few months.

Further, the stock’s PE also compares favorably with the industry’s trailing twelve months PE ratio, which stands at 16.7. 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 14.9, so it is fair to say that a slightly more value-oriented path may be ahead for Gap stock in the near term too.

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 0.9. This is much lower than the S&P 500 average, which comes in at 3.3x right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.

Broad Value Outlook

In aggregate, Gap currently has a 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.

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 A and a Momentum Score of A. This gives GPS a Zacks VGM score — or its overarching fundamental grade — of A. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been favorable. The current quarter has seen four estimates go higher in the past sixty days compared to no lower, while the full year estimate has seen eight up and no down in the same time period.

This has had just a small impact on the consensus estimate though as the current quarter consensus estimate has risen by 18.9% in the past two months, while the full year estimate has increased 6.4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Gap, Inc. (The) Price and Consensus

Gap, Inc. (The) Price and Consensus | Gap, Inc. (The) Quote

This positive trend signifies bullish analyst sentiment, and its Zacks Rank #2 (Buy) indicates robust fundamentals and expectations of outperformance in the near term.

Bottom Line

Gap is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Further, a strong industry rank (among Top 25% of more than 250 industries) instills investor optimism. However, over the past two years, the broader industry has clearly outperformed the market at large, as you can see below:

We believe, despite an unsatisfactory past industry performance, a good industry and Zacks rank signal that the stock is likely to benefit from favorable broader factors in the immediate future. Add to this robust value metrics, and we believe that we have a strong value contender in Gap.

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