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 10 Most Undervalued Companies for the Defensive Investor – August 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 Range Resources Corporation (RRC) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Range Resources Corporation (Range) is an independent natural gas, natural gas liquids (NGLs) and oil company. The Company is engaged in the engaged in the exploration, development and acquisition of natural gas and oil properties, mostly in the Appalachian and Midcontinent regions of the United States. The Company’s properties consist of interests in developed and undeveloped natural gas and oil leases in these regions. These interests are mostly in the form of working interests and, to a lesser extent, royalty and overriding royalty interests. The Company’s activities in the Midcontinent region include drilling, production and field operations in the Texas Panhandle, as well as in the Anadarko Basin of western Oklahoma, the Nemaha Uplift of northern Oklahoma and Kansas, the Permian Basin of West Texas and Mississippi.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||15.00%|
|MG Value based on 3% Growth||$13.66|
|MG Value based on 0% Growth||$8.01|
|Market Implied Growth Rate||15.11%|
|% of Intrinsic Value||100.56%|
Range Resources Corporation is not suitable for the more conservative Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg ratio. The Enterprising Investor is concerned by the level of debt relative to the current assets, and the lack of earnings stability over the last five years. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.04 in 2011 to an estimated $0.94 for 2015. This level of demonstrated earnings supports the market’s implied estimate of 15.11% 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 within a margin of safety relative to 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 Range Resources Corporation (RRC)? 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.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$30.35|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$373,608,000|
|Total Current Liabilities||$506,752,000|
|Shares Outstanding (Diluted Average)||166,421,000|
Earnings Per Share History
|Next Fiscal Year Estimate||-$0.73|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$0.94|
Other ModernGraham posts about the company
|19 Companies to Research This Week – 8/23/14|
|Range Resources Corporation Annual Valuation – 2014 $RRC|
Other ModernGraham posts about related companies
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. This is not investment advice and all readers should speak with a registered investment adviser prior to making any investment decision. ModernGraham is not affiliated with the company in any manner.