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 – September 2014. 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 Jacobs Engineering Group (JEC) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Jacobs Engineering Group Inc. is a technical professional services firm. The Company provides a diverse range of technical, professional, and construction services to a number of industrial, commercial, and governmental clients. The Company provides four categories of services: Project Services, Process, Scientific, and Systems Consulting services, Construction services, and Operations and Maintenance services. In July 2014, the Company acquired Federal Network Systems (FNS).
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 – 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 = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$42.34|
|Value Based on 0% Growth||$24.82|
|Market Implied Growth Rate||4.83%|
|Net Current Asset Value (NCAV)||-$0.59|
Balance Sheet – 6/27/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Jacobs Engineering does not pay a dividend.
Jacobs Engineering Group qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor is concerned with the low current ratio and the lack of dividend payments. The Enterprising Investor’s only initial concern is the lack of dividend payments. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. From a valuation perspective, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.61 in 2010 to an estimated $2.92 for 2014. This level of demonstrated growth does not support the market’s implied estimate of 4.83% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
Be sure to check out the previous ModernGraham valuations of Jacobs Engineering Group (JEC) for more perspective!
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 Jacobs Engineering Group (JEC)? 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 Jacobs Engineering Group (JEC) 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.