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Vera Bradley Inc (VRA:NASD); My Post-earnings Fair Value Estimate:


Abbreviations:

o My Estimate of Fair Value (MFV)

o Return on Invested Capital (ROIC)

o Liquidation Value = Tangible Book Value (TBV)

o Book Value (BV)

o Operating Income (OI)

o Enterprise Value (EV)

o Price-to-earnings ratio (P/E)


Vera Bradley Inc designs, manufactures, and sells handbags, travel, and fashion items. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before we get to those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be winner. Correspondingly, pros and cons as I see them.


Pros:

·The share price is <$15 and…

· Market Cap is <$250mm

o I may have a counterparty advantage from these first two, e.g. institutional investors may have rules preventing the purchase of lower priced, smaller Market Cap stocks. If so, I’m competing against fewer buyers to purchase shares, but may have more buyers to sell shares to if the share price and/or Market Cap increase.

·The % of shares short is <5%

o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company


Cons:

·Debt/MC is >50%

·The company’s OI is negative over the last twelve months

·The company has a tough year-over-year comparison in the upcoming quarter


Those pros and cons and—more importantly—the company’s average ROIC (~11% over the last 10-years) make it seem unlikely that the company has durable competitive advantages. So, I deem the company not good quantitatively and value it relative to its liquidation value, TBV of $7.87. Given the company’s seemingly good balance sheet and 5-yr average multiple of BV x 1**, I think TBV x 1 is a reasonable fair value, which equates to MFV of $7.87


At a recent price of $4.34, the differential between market value and MFV is -45%, thus shares seem undervalued.


Conclusion: I’m not confident the company can grow earnings in a sustainable way, so I will look to profit from mean reversion. However, the company’s TB has been falling for a couple of years. If TB continues to fall and substantially narrows the differential between market value and MFV, I will sell and move on.


My positioning: Long shares and call options


For more information about how and why I designate companies not good read here: (https://www.veriteventures.com/post/how-i-value-most-assets-companies)


-V


*Post prepared using data as of 12/7/22

**I’m using the company’s historical Book Value multiple as a proxy for Tangible Book because TB is <=BV and BV multiples are more readily available from data providers.

The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.

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