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 Undervalued Companies for the Defensive Investor Near 52 Week Lows. 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 Denbury Resources (DNR) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Denbury Resources Inc. is an independent oil and natural gas company. As of December 31, 2011, the Company had 461.9 million barrel of oil equivalent of proved oil and natural gas reserves, of which 77% was oil. The Company’s oil and natural gas properties are concentrated in the Gulf Coast and Rocky Mountain regions in the United States. As of December 31, 2011, the Company’s properties with proved and producing reserves in the Gulf Coast region were situated in Mississippi, Texas, Louisiana and Alabama, and in the Rocky Mountain region were primarily situated in Montana, North Dakota, Utah and Wyoming. In April 2012, it sold certain non-operated assets in the Greater Aneth Field in the Paradox Basin of Utah to Resolute Energy Corporation and the Navajo Nation Oil and Gas Company. In March 2013, it announced the closing of acquisition of producing property interests in the Cedar Creek Anticline (CCA) of Montana and North Dakota.
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 – FAIL
- 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 – 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||$16.31|
|Value Based on 0% Growth||$9.56|
|Market Implied Growth Rate||3.11%|
|Net Current Asset Value (NCAV)||-$18.42|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Denbury Resources does not qualify for either the Defensive Investor or the Enterprising Investor. The Defensive Investor has major concerns with the current ratio, the short dividend history, and the lack of sufficient earnings stability over the last ten years. The Enterprising Investor is concerned with the high 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 side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.66 in 2010 to an estimated $1.12 for 2014. This level of demonstrated growth outpaces the market’s implied estimate of 3.11% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above 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 Denbury Resources (DNR)? 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 Denbury Resources (DNR) 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.