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 – February 2015. 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 Owens-Illinois Inc. (OI) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Owens-Illinois, Inc. is a glass container manufacturer. The Company is also a preferred partner for various food and beverage brands. It provides glass packaging for beer, wine, spirits, food, non-alcoholic beverages, cosmetics and pharmaceuticals. It also produces tableware and stemware for household use. The Company manufactures glass containers in a range of sizes, shapes and colors. It has 77 glass manufacturing plants in 21 countries. The Company has four reportable segments based on its geographic locations: Europe, North America, South America and Asia Pacific. Its customers include Anheuser-Busch InBev, Brown Forman, Carlsberg, Coca-Cola, Constellation, Diageo, Heineken, Kirin, MillerCoors, Nestle, PepsiCo, Pernod Ricard, SABMiller, and Saxco International. The Company has 35 glass container manufacturing plants located in the Czech Republic, Estonia, France, Germany, Hungary, Italy, the Netherlands, Poland, Spain and the United Kingdom.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7
- 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 – 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 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 0/5
- 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 – FAIL
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$3.51|
|Value Based on 0% Growth||$2.06|
|Market Implied Growth Rate||50.21%|
|Net Current Asset Value (NCAV)||-$26.14|
Balance Sheet – December 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Owens-Illinois does not pay a dividend.
Owens-Illinois Inc. is not suitable for the Enterprising Investor or for the Defensive Investor. The Defensive Investor is concerned by the low current ratio, insufficient earnings growth or stability over the last ten years, lack of dividends, as well as the high PEmg PB ratio. The Enterprising Investor is concerned by the level of debt relative to the current assets, lack of earnings stability or growth over the last five years and the lack of dividends. 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 $1.50 in 2010 to $0.24 for 2014. This level of demonstrated growth does not support the market’s implied estimate of 50.21% 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 Owens-Illinois Inc. (OI) 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 Owens-Illinois Inc. (OI)? 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 Owens-Illinois Inc. (OI) 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.