Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Lowest PEmg Companies for the Enterprising Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Laboratory Corporation of America (LH) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Laboratory Corporation of America Holdings is a clinical laboratory company in the United States. Through a national network of laboratories, the Company offers a range of testing services used by the medical profession in routine testing, patient diagnosis, and in the monitoring and treatment of disease. In addition, it has developed specialty and niche operations based on certain types of specialized testing capabilities and client requirements, such as oncology testing, human immunodeficiency virus (HIV) genotyping and phenotyping, diagnostic genetics and clinical research trials. It processes tests on approximately 470,000 patient specimens daily and provides clinical laboratory testing services in all 50 states, the District of Columbia, Puerto Rico, Belgium, Japan, the United Kingdom, China, Singapore and three provinces in Canada.
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 – FAIL
- 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 – PASS
- 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 – PASS
- 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 – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$83.25|
|Value Based on 0% Growth||$48.80|
|Market Implied Growth Rate||4.39%|
|Net Current Asset Value (NCAV)||-$35.50|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Laboratory Corporation of America is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor has concerns regarding the company’s current ratio, lack of dividend payments, and high PB ratio. The Enterprising Investor is concerned with the level of long-term debt and the lack of dividend payments. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should look into other opportunities through a review of ModernGraham’s valuation of Quest Diagnostics (DGX) and ModernGraham’s valuation of Psychemedics Corp (PMD). From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $4.17 in 2009 to $5.74 for 2013. This solid level of demonstrated growth supports the market’s implied estimate of 4.39% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Laboratory Corporation of America (LH)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: The author did not hold a position in Laboratory Corporation of America (LH) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.