Would Ben Graham Buy This Stock?

07/21/2010 11:49 am EST


John Reese

Founder and CEO, Validea.com And Validea Capital Management

John Reese, editor of Validea Hot List, looks at a well-known retailer through the prism of Ben Graham’s value investing approach.

Jos. A Bank Clothiers, Inc. (Nasdaq: JOSB) is a designer, manufacturer, retailer, and direct marketer (through stores, catalog and Internet) of men's tailored and casual clothing and accessories. The company sells substantially all of its products exclusively under the Jos. A. Bank label through its 473 retail stores (as of January 30, 2010, which includes seven outlet stores and 13 franchise stores) located throughout 42 states and the District of Columbia in the United States, as well as through the company's nationwide catalog and Internet (www.josbank.com) operations. The company opened 14 stores (and closed one store) during the fiscal year ended January 30, 2010 (fiscal 2009).

[According to screens based on Benjamin Graham’s value investing approach,] the investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. JOSB's sales of $786.5 million, based on trailing 12 month sales, pass this test.

[Also.] the current ratio (current assets divided by current liabilities) must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. JOSB's current ratio of 4.18 passes the test.

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for Jos. A. Banks is $0.0 million, while the net current assets are $334.9 million. JOSB passes this test.

[Under Graham’s criteria,] companies must increase their earnings per share by at least 30% over a ten-year period and EPS must not have been negative for any year within the last five years. Companies with this type of growth tend to be financially secure and have proven themselves over time. JOSB's EPS growth over that period of 1,018.4% passes the EPS growth test.

The price/earnings (P/E) ratio, based on the greater of the current P/E or the P/E using average earnings over the last three fiscal years, must be "moderate", which [Graham’s] methodology states is not greater than 15x. Stocks with moderate P/Es are more defensive by nature. JOSB's P/E of 16.8x (using the three-year P/E) fails this test.

The price/book [value] ratio must also be reasonable—that is, the price/book multiplied by P/E cannot be greater than 22. Jos. A. Bank’s price/book ratio is 2.44x, while the P/E is 16.8x. JOSB fails the price/book test.

(The total score, according to the Graham methodology, is 71%. JOSB stock closed below $58 Tuesday—Editor.)

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