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 CBS Corporation (CBS) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): CBS Corporation operates businesses which span the media and entertainment industries. The Company operates in four segments. The Entertainment segment includes the CBS Television Network; CBS Television Studios; CBS Global Distribution Group (composed of CBS Studios International and CBS Television Distribution); CBS Films, and CBS Interactive. The Cable Networks segment includes Showtime Networks, the Company’s subscription program services; CBS Sports Network, the Company’s cable network focused on college athletics and other sports; and Smithsonian Networks, which operates Smithsonian Channel, a basic cable program service. The Publishing segment is composed of Simon & Schuster, which publishes and distributes consumer books. The Local Broadcasting segment includes CBS Television Stations, the Company’s 30 owned broadcast television stations, and CBS Radio, through which the Company owns and operates 126 radio stations in 27 United States markets.
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 – PASS
- 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 = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- 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 – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$52.84|
|Value Based on 0% Growth||$30.97|
|Market Implied Growth Rate||3.94%|
|Net Current Asset Value (NCAV)||-$24.05|
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
CBS Corporation is suitable for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the low current ratio, the insufficient earnings growth or stability over the last ten years, and the high PB ratio, while the Enterprising Investor is only concerned by the level of debt relative to the net current assets. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $1.23 in 2011 to an estimated gain of $3.64 for 2015. This level of demonstrated growth outpaces the market’s implied estimate of 3.94% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well 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 CBS Corporation (CBS)? 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.