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 Regions Financial Corporation (RF) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Regions Financial Corporation (Regions) is a financial holding company. Regions operate throughout the South, Midwest and Texas. The Company provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of investment banking, asset management, trust, mutual funds, securities brokerage, insurance and other specialty financing. Regions conduct its banking operations through Regions Bank, a commercial bank. As of December 31, 2011, Regions operated approximately 2,100 automated teller machines (ATMs) and 1,726 banking offices in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. It provides additional financial services through its subsidiaries, which includes Morgan Keegan & Company, Inc. and Regions Insurance Group, Inc. In April 2012, it sold Morgan Keegan & Company, Inc. and related affiliates to Raymond James.
Defensive Investor – must pass all 6 following tests: Score = 4/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – 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 – 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 – PASS
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 2/3
- 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 – PASS
|Value Based on 3% Growth||$7.65|
|Value Based on 0% Growth||$4.48|
|Market Implied Growth Rate||4.29%|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Regions Financial Corporation is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years. The Enterprising Investor is concerned with the lack of earnings stability 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 undervalued after growing its EPSmg (normalized earnings) from a loss of $1.75 in 2010 to a gain of $0.53 for 2014. This level of growth outpaces the market’s implied estimate of 4.29% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.
Be sure to check out previous ModernGraham valuations of Regions Financial Corporation (RF) for 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 Regions Financial Corporation (RF)? 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 Regions Financial Corporation (RF) 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.