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 Avago Technologies Ltd (AVGO) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Avago Technologies Limited is a designer, developer and global supplier of a range of analog semiconductor devices with a focus on III-V based products. III-V refers to elements from the 3rd and 5th groups in the periodic table of chemical elements, and examples of these materials are gallium arsenide (GaAs), gallium nitride (GaN), and indium phosphide (InP). The Company serves three primary target markets: wireless communications, which supports the wireless industry with a range of radio frequency (RF) semiconductor devices; wired infrastructure, which supplies transceivers that receive and transmit information along optical fibers, and industrial and other, which provides a range of products for the general industrial and automotive markets.
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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||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|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||Fail|
|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||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|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||$49.46|
|MG Value based on 0% Growth||$29.00|
|Market Implied Growth Rate||14.26%|
|% of Intrinsic Value||96.17%|
Avago Technologies Ltd qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the short history as a publicly traded company, short dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only initially concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.
As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.14 in 2011 to an estimated $3.41 for 2015. This level of demonstrated earnings growth supports the market’s implied estimate of 14.26% 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 Avago Technologies Ltd (AVGO)? 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)||-$8.43|
|Number of Consecutive Years of Dividend Growth||5|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$4,076,000,000|
|Total Current Liabilities||$906,000,000|
|Shares Outstanding (Diluted Average)||284,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$6.79|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$3.41|
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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 article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please take a moment to review our more detailed disclaimer.