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 Defensive Investor – December 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 CenturyLink Inc. (CTL) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): CenturyLink, Inc. (CenturyLink) is an integrated communications company. The Company is engaged primarily in providing a range of communications services to its residential, business, governmental and wholesale customers. The Company’s communications services include local and long-distance, network access, private line, public access, broadband, data, managed hosting (including cloud hosting), colocation, Wireless and video services. In certain local and regional markets, the Company also provides local access and fiber transport services to competitive local exchange carriers (CLECs) and security monitoring. The Company operates in four segments: Regional markets, Wholesale markets, Enterprise markets-network and Enterprise markets-data hosting. In November 2013, CenturyLink Inc acquired Tier 3 LLC.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- 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 – 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 = 1/5
- 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 – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$19.79|
|Value Based on 0% Growth||$11.60|
|Market Implied Growth Rate||10.22%|
|Net Current Asset Value (NCAV)||-$53.20|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
CenturyLink is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last ten years, and the high PEmg ratio. The Enterprising Investor is concerned with the level of debt relative to the current assets, and 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. As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $3.31 in 2010 to an estimated $1.36 for 2014. This level of demonstrated growth does not support the market’s implied estimate of 10.22% 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 CenturyLink (CTL)? 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 CenturyLink (CTL) 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.