Levi Strauss & Co.

Levi Strauss & Co is assigned a 3-star quantitative star rating, reflecting our opinion that this share class is a balanced choice, but prudent investors should consider looking elsewhere. The stock currently trades at a 5% discount to our quantitative fair value estimate of $21.23 per share; however, caution is warranted due to this estimate's high uncertainty rating.

The company's profitability strengthens our quantitative valuation. Highly profitable companies are often more resilient in recessions and are likely to generate stronger future cash flows for shareholders. Reflecting the firm's profitability is its earnings yield of 7.3%, which lies in the top 40% globally. This suggests that it is generating substantial earnings relative to its share price, which contributes to our view that shares are undervalued.

Alternatively, the company's balance sheet is potentially concerning. Low leverage can limit a company's ability to invest in growth, potentially reducing shareholder value compared with a balanced use of debt and equity financing. The firm's EBITDA/interest coverage ratio of 18.8, for example, ranks in the top 45% compared with global peers. The company may have too conservative of a balance sheet based on its high EBITDA/interest coverage ratio, potentially underinvesting in growth opportunities and undermining the long-term trajectory of cash flows. Despite our favorable price/fair value ratio, this characteristic is a negative attribute.

In addition to the aforementioned drivers, our model considers momentum as part of its comprehensive analysis. This share class has outperformed the broader universe over the past year. While we believe the stock is undervalued, this outperformance had a negative impact on our valuation estimate.

The company's narrow quantitative moat rating indicates it could outearn its cost of capital and maintain robust margins for 10 years or longer. In addition, the company's moderate financial health score is decent and doesn't seriously concern us with regard to financial distress.