Oil & Gas Stocks

AGL Resources Inc Valuation – June 2016 $GAS

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 – March 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 AGL Resources Inc (GAS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): AGL Resources Inc. (AGL Resources) is an energy services holding company engaged in the distribution of natural gas. The Company operates in four operating segments: distribution operations, retail operations, wholesale services and midstream operations. Its distribution operations segment is engaged in the operation, construction and maintenance of approximately 81,300 miles of natural gas pipeline and over 10 storage facilities and provides natural gas to residential, commercial and industrial customers. The retail operations segment provides natural gas commodity and related services. The wholesale services segment is engaged in natural gas storage, gas pipeline arbitrage and provides natural gas asset management and related logistics services for its utilities, as well as for non-affiliated companies. Midstream operations segment consists of the operations of natural gas storage facilities and select pipelines.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AGL – June 2016

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 $7,960,057,070 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.62 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 18.36% Fail
6. Moderate PEmg Ratio PEmg < 20 21.26 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.97 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 0.62 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -3.44 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

GAS value chart June 2016

EPSmg $3.10
MG Growth Estimate 3.54%
MG Value $48.34
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $44.97
MG Value based on 0% Growth $26.36
Market Implied Growth Rate 6.38%
Current Price $65.93
% of Intrinsic Value 136.38%

AGL Resources 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, insufficient earnings growth over the last ten years, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.51 in 2012 to an estimated $3.1 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 6.38% 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.

AGL Resources Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

GAS charts June 2016

Net Current Asset Value (NCAV) -$72.82
Graham Number $47.57
PEmg 21.26
Current Ratio 0.62
PB Ratio 1.97
Current Dividend $2.06
Dividend Yield 3.12%
Number of Consecutive Years of Dividend Growth 4

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $1,537,000,000
Total Current Liabilities $2,489,000,000
Long-Term Debt $3,273,000,000
Total Assets $14,336,000,000
Intangible Assets $1,918,000,000
Total Liabilities $10,304,000,000
Shares Outstanding (Diluted Average) 120,400,000

Earnings Per Share History

Next Fiscal Year Estimate $3.01
Dec2015 $2.94
Dec2014 $4.04
Dec2013 $2.64
Dec2012 $2.31
Dec2011 $2.12
Dec2010 $3.00
Dec2009 $2.88
Dec2008 $2.84
Dec2007 $2.72
Dec2006 $2.72
Dec2005 $2.48
Dec2004 $2.28
Dec2003 $2.01
Dec2002 $1.82
Sep2001 $1.62
Sep2000 $1.29
Sep1999 $1.29
Sep1998 $1.41
Sep1997 $1.37
Sep1996 $1.37

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.10
Dec2015 $3.03
Dec2014 $3.00
Dec2013 $2.51
Dec2012 $2.51
Dec2011 $2.64
Dec2010 $2.88
Dec2009 $2.79
Dec2008 $2.70
Dec2007 $2.57
Dec2006 $2.41
Dec2005 $2.19
Dec2004 $1.96
Dec2003 $1.74
Dec2002 $1.56
Sep2001 $1.42
Sep2000 $1.33

Recommended Reading:

Other ModernGraham posts about the company

5 Speculative and Overvalued Companies to Avoid – January 2015
AGL Resources Inc. Annual Valuation – 2015 $GAS
14 Companies in the Spotlight This Week – 1/4/14
ModernGraham Valuation: AGL Resources Inc. (GAS)

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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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