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 Low 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 NextEra Energy (NEE) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): NextEra Energy, Inc. (NEE) is an electric power company. The Company has over 42,000 megawatt of generating capacity in 26 states in the United States and four provinces in Canada. It also purchases electric power for resale to its customers and provides risk management services related to power and gas consumption for a limited number of customers. It is the generator in North America of renewable energy from the wind and sun. It owns and operates approximately 17% of the installed base of United States wind power production capacity and operates approximately 14% of the installed base of United States utility-scale solar power production capacity as of December 31, 2012. It also owns and operates one of the fleets of nuclear power stations in the United States, with eight reactors at five sites located in four states, representing approximately 6% of United States nuclear power electric generating capacity as of December 31, 2012.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- 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 – PASS
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
|Value Based on 3% Growth||$63.42|
|Value Based on 0% Growth||$37.18|
|Market Implied Growth Rate||6.95%|
|Net Current Asset Value (NCAV)||-$104.42|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
NextEra Energy is not suitable for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the concerns are the low current ratio and the high PEmg ratio. The Enterprising Investor is concerned with the high level of debt relative to the company’s current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of 5 Undervalued Companies for the Defensive Investor and 5 Low PEmg Companies for the Defensive Investor. From a valuation side of things, the company appears to be overvalued after growing its EPSmg from $3.65 in 2009 to only $4.37 in 2013. This low level of demonstrated growth does not support the market’s implied estimate of 6.95% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market 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 NextEra Energy Inc. (NEE)? 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 long position in NextEra Energy Inc. (NEE) 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.