Gap’s stock upgraded to ‘buy’

Gap has been recently upgraded by TheStreet Ratings from hold to buy.

As explained by their analysts, the company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, attractive valuation levels, and good cash flow from operations and expanding profit margins.

Gap’s stock has been volatile recently as the company is dealing with weak sales on the domestic front and in international markets that is weighing on the stock. “A look at Gap’s comparable sales reports over the past few years shows an interesting trend. Last year, international sales were strong, but this year they have been down. In the 2011 fiscal year same store international sales have declined every month, except for the month of June,” added from Trefis Analysis.

“We feel these strengths outweigh the fact that the company has had sub-par growth in net income,” they summarized. TheStreet Ratings' stock model projects a stock's total return potential over a 12-month period including both price appreciation and dividends.

Highlights from the ratings report include:

• GPS's revenue growth has slightly outpaced the industry average of 6.5%. Since the same quarter one year prior, revenues slightly increased by 2.1%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
• Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Specialty Retail industry and the overall market, GAP INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
• Net operating cash flow has significantly increased by 55.45% to $328.00 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 14.24%.
• 41.20% is the gross profit margin for GAP INC which we consider to be strong. Regardless of GPS's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 5.60% trails the industry average.