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 Undervalued 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 Intercontinental Exchange Group Inc. (ICE) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): IntercontinentalExchange Group, Inc., is a network of regulated exchanges and clearing houses for financial and commodity markets. The Company delivers transparent and accessible data, technology and risk management services to markets around the world through its portfolio of exchanges, including the New York Stock Exchange, ICE Futures, Liffe and Euronext. In February 2014, Intercontinentalexchange Group Inc completed the acquisition of Singapore Mercantile Exchange.
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 – 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||$98.20|
|Value Based on 0% Growth||$57.57|
|Market Implied Growth Rate||9.84%|
|Net Current Asset Value (NCAV)||-$67.41|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Intercontinental Exchange Group is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor has concerns with the low current ratio, the short dividend record, and the high PEmg ratio. The Enterprising Investor has significant concerns with the high level of debt relative to current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. From a valuation perspective, the company appears overvalued after growing its EPSmg (normalized earnings) from $4.37 in 2010 to an estimated $6.77 for 2014. This demonstrated level of growth does not support the market’s implied estimate of 9.84% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below 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 Intercontinental Exchange Group (ICE)? 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 Intercontinental Exchange Group (ICE) or in 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.