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 Quanta Services Inc (PWR) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Quanta Services, Inc. (Quanta) is a provider of specialty contracting services, offering infrastructure solutions primarily to the electric power, and natural gas and oil pipeline industries. The Company operates in two segments, such as electric power infrastructure services, and oil and gas infrastructure services. The Electric Power Infrastructure Services segment provides network solutions to the electric power industry. Its Electric Power Infrastructure Services segment includes various services, such as design, installation and maintenance of electric power transmission and distribution infrastructure and substation facilities, among others. The Oil and Gas Infrastructure Services segment provides network solutions to customers of development and transportation of natural gas and oil. Its Oil and Gas Infrastructure Services segment include the design, installation and maintenance of pipeline transmission, distribution systems and gathering systems, 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||$2,627,952,545||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.76||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|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||167.02%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||11.00||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.13||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||1.76||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||0.34||Pass|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Fail|
|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||$23.11|
|MG Value based on 0% Growth||$13.55|
|Market Implied Growth Rate||1.25%|
|% of Intrinsic Value||28.58%|
Quanta Services Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and the lack of dividends. The Enterprising Investor is only initially concerned by the lack of dividends. 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 $0.74 in 2011 to an estimated $1.59 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.25% 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 above the price.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||$0.87|
|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
|Balance Sheet Information||Sep2015|
|Total Current Assets||$2,362,664,000|
|Total Current Liabilities||$1,340,538,000|
|Shares Outstanding (Diluted Average)||206,193,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$1.88|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$1.59|
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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.