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 – November 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 Seagate Technology PLC (STX) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Seagate Technology plc (Seagate) is a provider of electronic data storage products. The Company’s products are hard disk drives (HDD). The Company produces a range of electronic data storage products, including solid state hybrid drives (SSHD), solid state drives (SSD), peripheral component interconnect express (PCIe) cards and Serial AT Attachment (SATA) controllers. The Company’s products are designed for enterprise servers and storage systems for applications, client compute applications and client non-compute applications. The Company’s product and solution portfolio for the enterprise data storage industry includes storage enclosures, integrated application platforms and high performance computing (HPC) data storage solutions. Its data storage services provide online backup, data protection and recovery solutions for small to medium-sized businesses. Its products include Enterprise Performance HDDs, Mobile HDDs and SSHDs, NAS HDDs, and Surveillance HDDs, among others.
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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||$7,911,553,069||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.80||Fail|
|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||-586.29%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||6.70||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||4.45||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||1.80||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||1.91||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||11.03%|
|MG Value based on 3% Growth||$60.04|
|MG Value based on 0% Growth||$35.20|
|Market Implied Growth Rate||-0.90%|
|% of Intrinsic Value||21.92%|
Seagate Technology PLC qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years, the low current ratio, and the inconsistent dividend record. The Enterprising Investor is only initially concerned by 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 undervalued after growing its EPSmg (normalized earnings) from $2.39 in 2012 to an estimated $4.14 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.9% annual earnings loss 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 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 Seagate Technology PLC (STX)? 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)||-$7.39|
|Number of Consecutive Years of Dividend Growth||6|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||Sep2015|
|Total Current Assets||$4,882,000,000|
|Total Current Liabilities||$2,718,000,000|
|Shares Outstanding (Diluted Average)||308,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.28|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$4.14|
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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. See my current holdings here. 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 be sure to review our detailed disclaimer.