Information Technology Stocks

CSRA Inc Valuation – Initial Coverage $CSRA

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 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017.  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 CSRA Inc (CSRA) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): CSRA Inc. is a provider of information technology services to the United States federal government. The Company operates through two segments: Defense and Intelligence, and Civil. The Defense and Intelligence segment provides services to the Department of Defense (DoD), National Security Agency, branches of the Armed Forces, and other DoD and Intelligence agencies. The Civil segment provides services to various federal agencies within the Department of Homeland Security (the DHS), Department of Health and Human services, and other federal civil agencies, as well as various state and local government agencies. It supplies civil government agencies with mission information systems and associated technical support services. It provides its customers with technical services across service areas, including Digital Services, Enterprise Business Services, Digital Platforms, Cyber, Data Science, and Professional and Citizen Services. It has conducted operations in over 130 locations.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of CSRA – February 2017

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 $4,910,453,356 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.99 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
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 2529900.00% Pass
6. Moderate PEmg Ratio PEmg < 20 36.54 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 16.17 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 0.99 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -283.33 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $0.82
MG Growth Estimate 15.00%
MG Value $31.42
Opinion Fairly Valued
MG Grade D+
MG Value based on 3% Growth $11.83
MG Value based on 0% Growth $6.94
Market Implied Growth Rate 14.02%
Current Price $29.82
% of Intrinsic Value 94.92%

CSRA 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 stability over the last ten years, the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability over the last five years. 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 Fairly Valued after growing its EPSmg (normalized earnings) from $0 in 2013 to an estimated $0.82 for 2017. This level of demonstrated earnings growth supports the market’s implied estimate of 14.02% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into CSRA Inc revealed the company was trading above its Graham Number of $9.3. The company pays a dividend of $0.4 per share, for a yield of 1.3% Its PEmg (price over earnings per share – ModernGraham) was 36.54, which was below the industry average of 38.13, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-21.64.

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

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$21.64
Graham Number $9.30
PEmg 36.54
Current Ratio 0.99
PB Ratio 16.17
Current Dividend $0.40
Dividend Yield 1.34%
Number of Consecutive Years of Dividend Growth 2

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Total Current Assets $1,013,000,000
Total Current Liabilities $1,022,000,000
Long-Term Debt $2,550,000,000
Total Assets $4,886,000,000
Intangible Assets $3,201,000,000
Total Liabilities $4,582,000,000
Shares Outstanding (Diluted Average) 164,888,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.06
Mar2016 $0.53
Mar2015 -$0.06

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.82
Mar2016 $0.16
Mar2015 -$0.02

Recommended Reading:

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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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