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 Prudential Financial Inc (PRU) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Prudential Financial, Inc. is a financial services company. The Company, through its subsidiaries and affiliates, provides a arrange of financial products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. The Company has organized its principal operations into the Financial Services Businesses and the Closed Block Business. The Financial Services Businesses consists of three divisions, containing six segments, and the Company’s corporate operations. The Financial Services Businesses operate through three operating divisions: U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance. The Company’s investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, equity securities and other invested assets.
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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 all 6 of the following tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$26,234,479,032||Pass|
|2. Earnings Stability||Positive EPS for 10 years prior||Fail|
|3. Dividend Record||Dividend Payments for 10 years prior||Pass|
|4. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||23.75%||Fail|
|5. Moderate PEmg Ratio||PEmg < 20||10.78||Pass|
|6. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||0.62||Pass|
|Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.|
|1. Earnings Stability||Positive EPS for 5 years prior||Fail|
|2. Dividend Record||Currently Pays Dividend||Pass|
|3. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-0.18%|
|MG Value based on 3% Growth||$77.99|
|MG Value based on 0% Growth||$45.72|
|Market Implied Growth Rate||1.14%|
|% of Intrinsic Value||132.53%|
Prudential Financial Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, and the insufficient earnings growth over the last ten years. The Enterprising Investor has concerns regarding the lack of earnings growth or stability over the last five years. As a result, value investors following the ModernGraham approach should explore other opportunities or proceed with a speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $5.44 in 2011 to an estimated $5.38 for 2015. This level of demonstrated earnings growth does not support the market’s implied estimate of 1.14% 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
|Number of Consecutive Years of Dividend Growth||7|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||Sep2015|
|Shares Outstanding (Diluted Average)||459,700,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$12.70|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$5.38|
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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.