ModernGraham Valuation: AGL Resources Inc. (GAS)

moneyCompany Profile (obtained from Google Finance): AGL Resources Inc. (AGL Resources) is an energy services holding company whose principal business is the distribution of natural gas. AGL Resources operates its natural gas in seven states includes Illinois, Georgia, Virginia, New Jersey, Florida, Tennessee and Maryland. As of December 31, 2011, the Company’s seven utilities served approximately 4.5 million customers. It is involved in several related and complementary businesses. Its retail operations segment serves more than one million retail customers and markets natural gas and related home services to customers in Georgia, Illinois, Ohio, Florida and New York. The Company operates in five operating segments: distribution operations, retail operations, wholesale services, midstream operations, cargo shipping and one non-operating segment-other. On December 9, 2011, the Company completed its merger with Nicor Inc.

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 = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. 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 – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $15.75
MG Opinion Overvalued
Value Based on 3% Growth $37.25
Value Based on 0% Growth $21.83
Market Implied Growth Rate 4.94%
Net Current Asset Value (NCAV) -$69.78
PEmg 18.39
Current Ratio 0.87
PB Ratio 1.59

Balance Sheet – 9/30/2013 

Current Assets $2,091,000,000
Current Liabilities $2,407,000,000
Total Debt $3,816,000,000
Total Assets $13,904,000,000
Intangible Assets $2,063,000,000
Total Liabilities $10,379,000,000
Outstanding Shares 118,780,000

Earnings Per Share

2013 (estimated) $2.80
2012 $2.31
2011 $2.13
2010 $3.01
2009 $2.88
2008 $2.83
2007 $2.73
2006 $2.72
2005 $2.48
2004 $2.28
2003 $2.13

Earnings Per Share – Modern Graham 

2013 (estimated) $2.57
2012 $2.51
2011 $2.65
2010 $2.88
2009 $2.79
2008 $2.70

Conclusion:

AGL Resources Inc. does not qualify for either the Defensive Investor or the Enterprising Investor, due in part to its large level of debt relative to its current assets, but also as a result of its poor history of growth.  This company may be suitable for those looking for a dividend, but if the company does not begin to see growth it is unlikely to be able to continue to grow dividends into the future.  Defensive Investors and Enterprising Investors should proceed with researching other companies, starting with a review of the 5 Low PE Companies we reviewed yesterday at Seeking Alpha.  As it stands, the company’s EPSmg (normalized earnings) shrunk from $2.70 in 2008 to an estimated $2.57 for 2013.  In the meantime, the market is implying a growth rate of 4.94%.  Clearly the historical performance of the company does not support the market’s estimate, and so from a valuation perspective the company would appear to be overvalued.

What do you think?  Do you agree that AGL Resources Inc. is overvalued?  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 AGL Resources Inc. (AGL) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

Get a free copy of ModernGraham Stocks & Screens: March 2014 by signing up for our free daily email list! Sign up now and make sure you don't miss any valuations.

Leave a Reply

Your email address will not be published. Required fields are marked *