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PPL Corporation Valuation – January 2016 Update $PPL

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 PPL Corporation (PPL) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): PPL Corporation (PPL) is an energy and utility holding company. Through its subsidiaries, PPL delivers electricity to customers in the United Kingdom, Pennsylvania, Kentucky, Virginia and Tennessee; delivers natural gas to customers in Kentucky; generates electricity from power plants in the northeastern, northwestern and southeastern United States, and markets wholesale or retail energy in the northeastern and northwestern parts of the United States. PPL operates in four segments: The U.K. Regulated Segment comprising PPL Global comprising WPD Ltd’s (WPD) regulated electricity distribution operations; Kentucky Regulated segment comprising the operations of LG&E and KU Energy LLC, which owns and operates regulated public utilities; the Pennsylvania Regulated segment comprising PPL Electric Utilities Corporation’s operations, and the Supply segment comprising the activities of PPL Energy Supply, LLC’s subsidiaries.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of PPL

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $23,092,060,000 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.67 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
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 -36.10% Fail
6. Moderate PEmg Ratio PEmg < 20 19.11 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.31 Pass
Score
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 0.67 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -12.01 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 Fail

Stage 2: Determination of Intrinsic Value

PPL value chart January 2016

EPSmg $1.83
MG Growth Estimate -2.75%
MG Value $5.49
Opinion Overvalued
MG Value based on 3% Growth $26.60
MG Value based on 0% Growth $15.59
Market Implied Growth Rate 5.30%
Current Price $35.06
% of Intrinsic Value 638.85%

PPL Corporation does not qualify for either the Enterprising Investor or the more conservative Defensive 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 by the level of debt relative to the current assets, and the lack of earnings growth 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 at this time or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $2.25 in 2011 to an estimated $1.83 for 2015.  This level of earnings growth does not support the market’s implied estimate of 5.3% 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 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 PPL Corporation (PPL)?  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

PPL charts January 2016

Net Current Asset Value (NCAV) -$38.64
Graham Number $16.34
PEmg 19.11
Current Ratio 0.67
PB Ratio 2.31
Dividend Yield 4.27%
Number of Consecutive Years of Dividend Growth 4

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Sep2015
Total Current Assets $2,990,000,000
Total Current Liabilities $4,468,000,000
Long-Term Debt $17,745,000,000
Total Assets $39,246,000,000
Intangible Assets $4,285,000,000
Total Liabilities $29,024,000,000
Shares Outstanding (Diluted Average) 673,702,000

Earnings Per Share History

Next Fiscal Year Estimate $0.78
Dec2014 $2.61
Dec2013 $1.76
Dec2012 $2.60
Dec2011 $2.70
Dec2010 $2.17
Dec2009 $1.08
Dec2008 $2.47
Dec2007 $3.35
Dec2006 $2.24
Dec2005 $1.65
Dec2004 $1.87
Dec2003 $2.18
Dec2002 $0.68
Dec2001 $0.61
Dec2000 $1.72
Dec1999 $1.42
Dec1998 -$1.73
Dec1997 $0.90
Dec1996 $1.03

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.83
Dec2014 $2.36
Dec2013 $2.18
Dec2012 $2.33
Dec2011 $2.25
Dec2010 $2.10
Dec2009 $2.10
Dec2008 $2.51
Dec2007 $2.44
Dec2006 $1.90
Dec2005 $1.62
Dec2004 $1.54
Dec2003 $1.35
Dec2002 $0.81
Dec2001 $0.78
Dec2000 $0.79
Dec1999 $0.33

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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.  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.

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