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 – May 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 Facebook stock analysis showing a specific look at how Facebook Inc. (FB) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Facebook, Inc., is a social networking website company. The Company’s mission is to give people the power to share and make the world open and connected. The Company’s business focuses on creating value for users, marketers, and developers. The Company engaging products that enable users to: Connect and Share with Friends, Discover and Learn, Express, and Stay Connected Everywhere. The Company’s products include: Facebook, Messenger, and Instagram. Facebook, mobile app and website enable people to connect, share, discover, and communicate with each other on mobile devices and personal computers. Messenger, a mobile-to-mobile messaging application available on iOS and Android phones. Instagram, mobile app and website that enable people to take photos or videos, customize them with filter effects, and share them with friends and followers.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – 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 – 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 = 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 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$14.77|
|Value Based on 0% Growth||$8.66|
|Market Implied Growth Rate||35.00%|
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
Facebook Inc. does not pay a dividend.
As this Facebook stock analysis shows, Facebook Inc. is suitable for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the short operating history as a publicly traded company, as well as the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned by the lack of dividends. 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 overvalued despite growing its EPSmg (normalized earnings) from $0.24 in 2011 to an estimated $1.02 for 2015. This level of demonstrated growth does not support the market’s implied estimate of 35% annual earnings growth over the next 7-10 years and leads 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 Facebook Inc. (FB)? 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.