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 Most Undervalued Companies for the Enterprising Investor – November 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 Allegheny Technologies (ATI) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Allegheny Technologies Incorporated (ATI) is a diversified specialty metals producer. The Company’s products include titanium and titanium alloys, nickel-based alloys and superalloys, zirconium, hafnium and niobium, advanced powder alloys, stainless and specialty steel alloys, grain-oriented electrical steel, tungsten-based materials and cutting tools, carbon alloy impression die forgings, and grey and ductile iron castings. Its specialty metals are produced in a range of alloys and product forms. It operates in three segments: High Performance Metals segment, Flat-Rolled Products segment and Engineered Products segment. In February 2014, the Company acquired Dynamic Flowform Corp. In June 2014, it acquired Hanard Machine, Inc. The new business will operate as ATI Cast Products, Salem Operations, and be a part of ATI’s titanium investment casting business.
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 – PASS
- 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 – 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
- 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 – 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 – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$12.82|
|Value Based on 0% Growth||$7.51|
|Market Implied Growth Rate||15.21%|
|Net Current Asset Value (NCAV)||-$11.20|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Allegheny Technologies does not qualify for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned by the lack of earnings stability or growth over the last ten years, and the high PEmg ratio. The Enterprising Investor is concerned by the lack of earnings stability or growth over the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time. From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $2.80 in 2010 to only an estimated $0.88 for 2014. This lack of demonstrated growth does not support the market’s implied estimate of 15.21% 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 previous ModernGraham valuations of Allegheny Technologies Inc. (ATI) for a greater 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 Allegheny Technologies Inc. (ATI)? 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 Allegheny Technologies Inc. (ATI) 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.