Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$59.47|
|Value Based on 0% Growth||$34.86|
|Market Implied Growth Rate||14.55%|
Balance Sheet – 9/30/2013
Earnings Per Share
Earnings Per Share – Modern Graham
Simon Property Group is a REIT that has shown strong earnings growth over the historical period. Unfortunately, the company does not qualify for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company comes up short in the current ratio, and has PEmg and PB ratios that are too high. For the Enterprising Investor, the company’s high level of debt relative to its current assets disqualifies it from potential investment. Value investors seeking to follow ModernGraham’s modernized version of Benjamin Graham’s methods should do further research into other companies, including reviewing ModernGraham’s valuation of Realty Income Corp (O). From a valuation perspective, Simon Property Group performs fairly well. Its EPSmg (normalized earnings) have grown from $1.84 in 2008 to an estimated $4.10 for 2013. This is strong growth that supports the market’s current estimate of 14.55% growth, leading to a conclusion that the company may be fairly valued at the current time.
What do you think? Do you agree that Simon Property Group is fairly valued? What would be your assessment? Is the company not suitable for Defensive Investors and Enterprising Investors? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author did not hold a position in Simon Property Group (SPG) at the time of publication and had no intention of entering into a position within the next 72 hours.
Photo Credit: Andrew Magill