A Comparison of Four Listed Companies
This is the thirteenth discussion of the ModernGraham Book Club’s reading of The Intelligent Investor by Benjamin Graham (affiliate link). In last week’s discussion, we discussed the twelfth chapter, which looked at factors Intelligent Investors should consider when utilizing earnings per share data This week we will discuss the thirteenth chapter, which is titled “A Comparison of Four Listed Companies.” I encourage you to purchase the book (preferably by clicking the link to Amazon, because a purchase through that link will help support the club) and join in with us as we read through a chapter each week; however, even if you don’t have the book I think you will find our discussions to be very useful in your own understanding of value investing, and you can still bring a lot to the discussion from your own experiences as an investor. Whether this is the first day you’ve ever been interested in investing, or you have decades of experience with the stock market, we’d love to hear your thoughts in the comments below!
Please feel free to leave a comment on this post with your own responses to the questions, along with any other thoughts you have, and return throughout the next couple of days to see what others have said. If you find something that has been said by another commentator interesting, feel free to respond to them with another comment. We’ve had some great discussions throughout the book club, so keep it up!
In this chapter, Graham does exactly what his title eludes to: he compares four different companies to discuss the applications of some of the concepts he has raised in earlier chapters. This is a great read for anyone who wants a brief explanation of some of the practical implications of Graham’s methods, and the comparison serves as a good introduction to the chapters that follow. Of the four companies Graham reviewed, two of them passed all seven of his Defensive Investor requirements, and it is interesting to find that in Zweig’s notes, one of the ones that did not pass the requirements dropped in price by nearly 73% in only 10 years.
Defensive Investor Requirements
|Adequate Size of Enterprise – market capitalization of at least $2 billion||Pass||Pass||Pass||Pass|
|Sufficiently Strong Financial Condition – current ratio greater than 2||Fail||Pass||Fail||N/A*|
|Earnings Stability – positive earnings per share for at least 10 straight years||Fail||Pass||Pass||Pass|
|Dividend Record – has paid a dividend for at least 10 straight years||Fail||Pass||Fail||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||Fail||Pass||Pass||Pass|
|Moderate PEmg ratio – PEmg is less than 20||Fail||Pass||Fail||Pass|
|Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50||Fail||Pass||Fail||Pass|
Enterprising Investor Requirements
|Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5||Fail||Pass||Pass||N/A*|
|Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1||Fail||Pass||Pass||N/A*|
|Earnings Stability – positive earnings per share for at least 5 years||Fail||Pass||Pass||Pass|
|Dividend Record – currently pays a dividend||Fail||Pass||Fail||Pass|
|Earnings growth – EPSmg greater than 5 years ago||Fail||Pass||Pass||Pass|
*As a financial company, Wells Fargo is not required to pass the tests regarding current assets and current liabilities.
|Value Based on 3% Growth||$13.00||$28.46||$32.24||$50.5|
|Value Based on 0% Growth||$7.62||$16.68||$18.90||$29.6|
|Market Implied Growth Rate||213.23%||2.33%||73.36%||2.79%|
|Net Current Asset Value (NCAV)||-$11.88||-$0.67||-$16.40||14.08|
Earnings per Share – ModernGraham
|2014||not yet estimated||$1.96||$2.22||$3.48|
Comparing the four, it is clear that the gems are Intel and Wells Fargo, while the market may be expressing over-exuberance regarding Amazon and Netflix. After all, Wells Fargo’s EPSmg (normalized earnings) for 2013 were more than four times the amount Amazon earned that year, and yet Amazon’s price is nearly six times the price for Wells Fargo. In order for that price difference to be justified, Amazon would have to achieve extremely high growth going forward, but the historical data actually shows the company has seen a drop in its EPSmg every year since 2010.
Please leave a comment below and feel free to answer any of these questions, or just give your general thoughts.
- What quote from this chapter do you think best summarizes the point Graham is making?
When considering potential investments against one another, what factors do you utilize in analysis?
- What do you think of Amazon, Intel, Netflix, and/or Wells Fargo?
- What four companies would you compare today?
- What did you think of the chapter overall?
Next Week’s Discussion: Chapter Fourteen
Chapter Title – Stock Selection for the Defensive Investor
When reading the next chapter, try to think about how the concepts Graham presents in the chapter could apply to your own investments, whether you consider yourself a Defensive Investor or an Enterprising Investor.
What are some other ways to participate?
If you are a blogger, you can give your thoughts in a post on your own site, link to the discussion here on ModernGraham, and I will be sure to let our readers know that the conversation is going on over at your site as well.
In addition, you can use the hashtag #MGBookClub in social media to talk about the book on Twitter or Facebook!