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 – April 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 Edison International (EIX) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Edison International, is a parent holding company of Southern California Edison Company (SCE) and subsidiaries. The Company operates through its operating subsidiaries. SCE is a utility company primarily engaged in the business of supplying and delivering electricity in the United States. The Company is also the parent company of subsidiaries engaged in businesses related to the generation or use of electricity. The Company’s another subsidiary, Edison Capital, holds energy and infrastructure investments in the form of leveraged leases and partnership interests in housing projects in the United States. Another subsidiary, SoCore Energy, LLC, is a distributer of solar developer focused on commercial rooftop installations. The Company also has subsidiaries formed to hold equity interests and engage in businesses in emerging sectors of the electricity industry.
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 = 2/5
- 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 – PASS
|Value Based on 3% Growth||$42.46|
|Value Based on 0% Growth||$24.89|
|Market Implied Growth Rate||6.11%|
|Net Current Asset Value (NCAV)||-$108.58|
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
Edison International 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 poor PEmg ratio. The Enterprising Investor is concerned with the level of debt relative to the current assets and 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 overvalued after growing its EPSmg (normalized earnings) from $2.21 in 2011 to only an estimated $2.93 for 2015. This level of growth does not support the market’s implied estimate of 6.11% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below 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 Edison International (EIX)? 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 any 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.