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 Zions Bancorporation (ZION) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Zions Bancorporation (the Parent) is a financial holding company. The Company (the Parent and its subsidiaries) owns and operates eight commercial banks with a total of approximately 469 domestic branches as of December 31, 2013. The Company provides banking and related services through its banking and other subsidiaries, in Utah, California, Texas, Arizona, Nevada, Colorado, Idaho, Washington, and Oregon. The Company focuses on providing community banking services by its core business lines of small and medium-sized business and corporate banking; commercial and residential development, construction and term lending; retail banking; treasury cash management and related products and services; residential mortgage servicing and lending; trust and wealth management; limited capital markets activities, including municipal finance advisory and underwriting, and investment activities.
Defensive Investor – must pass all 6 following tests: Score = 3/6
- 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 – 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 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||$16.39|
|Value Based on 0% Growth||$9.61|
|Market Implied Growth Rate||7.51%|
Balance Sheet – December 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Zions Bancorporation 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 along with the high PEmg ratio. 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 $3.06 in 2010 to a gain of $1.13 for 2014. This level of growth outpaces the market’s implied estimate of 7.51% 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 Zions Bancorporation (ZION) 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 Zions Bancorporation (ZION)? 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 Zions Bancorporation (ZION) 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.