Is Urban Outfitters' Stock Reasonable by the Numbers?

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Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap Urban Outfitters (NAS: URBN) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Urban Outfitters has a P/E ratio of 15.6 and an EV/FCF ratio of 34.3 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Urban Outfitters has a P/E ratio of 16.7 and a five-year EV/FCF ratio of 21.9.

A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.

Urban Outfitters has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Urban Outfitters15.634.316.721.9
American Eagle Outfitters13.523.011.111.2
Abercrombie & Fitch19.425.016.116.3
Gap8.99.88.97.6

Source: S&P Capital IQ; NM = not meaningful due to losses.

Numerically, we've seen how Urban Outfitters's valuation rates on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Urban Outfitters' net income margin has ranged from 9.2% to 12.6%. In that same time frame, unlevered free cash flow margin has ranged from 4.0% to 12.2%.

How do those figures compare with those of the company's peers? See for yourself:

anImage

Source: S&P Capital IQ; margin ranges are combined.

Additionally, over the last five years, Urban Outfitters has hit it every time, tallying up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out ...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you willoverpay for stocks.  But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Urban Outfitters has put up past EPS growth rates of 14.5%. Meanwhile, Wall Street's analysts expect future growth rates of 16.6%.

Here's how Urban Outfitters compares to its peers for trailing five-year growth:

anImage

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

anImage

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us at what price multiples shares of Urban Outfitters are trading, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a moderate 15.6 P/E ratio and we see that Urban's EV/FCF ratios are a bit higher. And overall, its price multiples are at a premium to its competitors. Meanwhile, margins are consistently profitable but roughly in line with the competition. Where Urban separates itself a bit is its ability to grow in this rough economic environment, with earnings up a good bit over five years ago.

The initial numbers are reasonable -- Urban Outfitters is selling at a premium for premium performance. My initial thoughts are roughly in line with our CAPS community, who rate it three stars out of five. But this is just a start. If you find Urban Outfitters' numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to your Watchlist to find all of our Foolish analysis.

I wrote about a stock that's flying under the radar in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the company I believe Warren Buffett would be interested in if he could still invest in small companies.

At the time this article was published Anand Chokkaveluowns shares of American Eagle Outfitters. The Motley Fool owns shares of Gap. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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