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Rating Change Detail - GUESS?, INC. (GES) - 2/6/2010
The stock was downgraded from Some Interest to No Interest on 2/6/2010 by the Small-Cap Growth Investor Strategy based on the principles of the Motley Fool. The score according to this strategy fell from 72% to 59%. A full detailed analysis of GES using this strategy is included below. For a full detailed analysis of GES using 12 proven strategies of Wall Street Legends, take a free trial to Validea.com

Detailed Analysis of GUESS?, INC. (GES)

Strategy: Small Cap Growth Investor - Based on: Motley Fool

PROFIT MARGIN: [PASS]

This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. GES's profit margin of 10.08% passes this test.

RELATIVE STRENGTH: [FAIL]

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. GES, with a relative strength of 84, fails this test.

COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [FAIL]

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for GES (1.47% for EPS, and -0.97% for Sales) are not good enough to pass.

INSIDER HOLDINGS: [PASS]

GES's insiders should own at least 10% (they own 36.29% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well.

CASH FLOW FROM OPERATIONS: [PASS]

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. GES's free cash flow of $1.12 per share passes this test.

PROFIT MARGIN CONSISTENCY: [PASS]

GES's profit margin has been consistent or even increasing over the past three years (Current year: 10.20%, Last year: 10.66%, Two years ago: 5.87%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.

R&D AS A PERCENTAGE OF SALES: [NEUTRAL]

This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in GES's case.

CASH AND CASH EQUIVALENTS: [FAIL]

GES does not have a sufficiently large amount of cash, $294.12 million, on hand relative to its size. Although this criteria does not apply to companies of this size, we defined anything greater than $500 million in cash as having 'a lot of cash' to allow analysis of these companies. GES will have more of a difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criterion.

INVENTORY TO SALES: [PASS]

This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for GES was 13.27% last year, while for this year it is 11.45%. Since the inventory to sales is decreasing by -1.82% the stock passes this criterion.

ACCOUNT RECEIVABLE TO SALES: [PASS]

This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for GES was 14.54% last year, while for this year it is 12.63%. Since the AR to sales is decreasing by -1.91% the stock passes this criterion.

LONG TERM DEBT/EQUITY RATIO: [PASS]

GES's trailing twelve-month Debt/Equity ratio (1.62%) is a little higher than what this methodology is looking for, but is still at an acceptable level. The superior companies that you are looking for don't need to borrow money in order to grow. This company has borrowed very little which is still OK.

"THE FOOL RATIO" (P/E TO GROWTH): [PASS]

The "Fool Ratio" is an extremely important aspect of this analysis. If the company's Fool Ratio is between 0.5 and 0.65 (GES's is 0.51), the company demonstrates excellence in its fundamentals and have soundly beat the earnings estimates. GES passes this test.

The following criteria for GES are less important which means you would place less emphasis on them when making your investment decision using this strategy:

AVERAGE SHARES OUTSTANDING: [PASS]

GES has not been significantly increasing the number of shares outstanding within recent years which is a good sign. GES currently has 92.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.

SALES: [FAIL]

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. GES's sales of $2,047.5 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.

DAILY DOLLAR VOLUME: [FAIL]

GES does not pass the Daily Dollar Volume (DDV of $43.3 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it.

PRICE: [PASS]

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. GES with a price of $38.54 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.

INCOME TAX PERCENTAGE: [PASS]

GES's income tax paid expressed as a percentage of pretax income this year was (32.55%) and last year (39.84%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.

For a full detailed analysis of GES using 12 proven strategies of Wall Street Legends,
take a free trial to Validea.com

Rating Change Detail - GUESS?, INC. (GES) - 2/6/2010

Detailed Analysis of GUESS?, INC. (GES)

Strategy: Small Cap Growth Investor - Based on: Motley Fool