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 the 5 Highest Dividend Yields Among 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 NiSource Inc. (NI) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): NiSource Inc. (NiSource) is an energy holding company whose subsidiaries provide natural gas, electricity and other products and services to approximately 3.8 million customers located within a corridor that runs from the Gulf Coast through the Midwest to New England. NiSource operates in three business segments: Gas Distribution Operations; Gas Transmission and Storage Operations, and Electric Operations. NiSource’s principal subsidiaries include Columbia Energy Group (Columbia), a vertically-integrated natural gas distribution, transmission and storage holding company whose subsidiaries provide service to customers in the Midwest, the Mid-Atlantic and the Northeast; Northern Indiana Public Service Company (Northern Indiana), a vertically-integrated gas and electric company providing service to customers in northern Indiana, and Bay State Gas Company (Columbia of Massachusetts), a natural gas distribution company serving customers in Massachusetts.
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 – 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 – 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 – 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||$21.16|
|Value Based on 0% Growth||$12.40|
|Market Implied Growth Rate||8.94%|
|Net Current Asset Value (NCAV)||-$46.93|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
NiSource Inc. does not satisfy either the Defensive Investor or the Enterprising Investor’s requirements. The Defensive Investor has concerns with the low current ratio, and the poor PEmg and PB ratios while the Enterprising Investor is concerned with the level of debt relative to the 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 to be significantly overvalued after seeing its EPSmg (normalized earnings) grow from $1.07 in 2010 to only an estimated $1.46 for 2014. This low level of demonstrated growth does not support the market’s implied estimate of 8.94% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well 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 NiSource Inc. (NI)? 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.
Disclaimer: The author did not hold a position in NiSource Inc. (NI) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.