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 – July 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 stock analysis showing a specific look at how Eversource Energy (ES) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Eversource Energy, formerly Northeast Utilities, is a utility holding company engaged in the energy delivery business. The Company operates through three segments: electric distribution, electric transmission and natural gas distribution. The Company’s electric distribution segment provides electricity to retail customers in Connecticut and eastern Massachusetts. The electric transmission segment owns and maintains transmission facilities that are part of an interstate power transmission grid over which electricity is transmitted throughout New England. The natural gas distribution segment provides firm natural gas sales service to retail customers who require a continuous natural gas supply throughout the year, such as residential customers who rely on natural gas for heating, hot water and cooking needs, and commercial and industrial customers who choose to purchase natural gas from the Company’s natural gas distribution companies.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- 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 – PASS
- 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 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- 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 – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$36.53|
|Value Based on 0% Growth||$21.41|
|Market Implied Growth Rate||5.29%|
|Net Current Asset Value (NCAV)||-$53.53|
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
Eversource Energy does not qualify for either the Defensive Investor and the Enterprising Investor. The Defensive Investor is concerned with the low current ratio as well as the insufficient earnings growth over the last ten years. The Enterprising Investor is concerned with the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude. As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.03 in 2011 to an estimated $2.52 for 2015. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.29% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value falling 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 Eversource Energy (ES)? 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.