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 Companies Benjamin Graham Would Invest In Today – February 2016. 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 Air Products & Chemicals (APD) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Air Products and Chemicals, Inc. (Air Products) serves energy, electronics, chemicals, steel, and manufacturing customers with a portfolio of products, services, and solutions that include atmospheric gases, process and specialty gases, performance materials, equipment, and services. The Company operates in four business segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. Merchant Gases sells atmospheric gases, such as oxygen, nitrogen, and argon, process gases, medical and specialty gases, and certain services and equipment. Tonnage Gases provides hydrogen, carbon monoxide, nitrogen, oxygen, and synthesis gas. Electronics and Performance Materials provide the electronics industry with specialty gases. Equipment and Energy designs and manufactures cryogenic equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction (LNG), and helium distribution.
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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||$28,080,319,780||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.80||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||51.83%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||22.06||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||3.92||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||0.80||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-5.36||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||3.02%|
|MG Value based on 3% Growth||$85.94|
|MG Value based on 0% Growth||$50.38|
|Market Implied Growth Rate||6.78%|
|% of Intrinsic Value||151.77%|
Air Products & Chemicals Inc 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 high PEmg and PB ratios. The Enterprising Investor is concerned by 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 at this time or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $4.93 in 2012 to an estimated $5.93 for 2016. This level of earnings growth does not support the market’s implied estimate of 6.78% 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.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$33.45|
|Number of Consecutive Years of Dividend Growth||20|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||Sep2015|
|Total Current Assets||$2,910,800,000|
|Total Current Liabilities||$3,648,100,000|
|Shares Outstanding (Diluted Average)||217,600,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$7.35|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$5.93|
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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.