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ModernGraham Valuation: Entergy Corp (ETR)

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Company Profile (obtained from Google Finance): Entergy Corporation (Entergy) is an integrated energy company engaged primarily in electric power production and retail distribution operations. It owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, including more than 10,000 megawatts of nuclear power. Entergy delivers electricity to 2.8 million utility customers in Arkansas, Louisiana, Mississippi and Texas. Entergy operates through two business segments: Utility and Entergy Wholesale Commodities. The Utility business segment includes the generation, transmission, distribution, and sale of electric power in portions of Arkansas, Mississippi, Texas, and Louisiana, including the City of New Orleans; and operates a small natural gas distribution business. The Entergy Wholesale Commodities business segment includes the ownership and operation of six nuclear power plants located in the northern United States and the sale of the electric power produced by those plants to wholesale customers.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $32
MG Opinion Overvalued
Value Based on 3% Growth $78
Value Based on 0% Growth $46
Market Implied Growth Rate 1.48%
Net Current Asset Value (NCAV) -$170.11
PEmg 11.46
Current Ratio 1.01
PB Ratio 1.16

Balance Sheet – 9/30/2013 

Current Assets $3,489,600,000
Current Liabilities $3,439,000,000
Total Debt $12,308,300,000
Total Assets $43,324,100,000
Intangible Assets $377,200,000
Total Liabilities $33,821,700,000
Outstanding Shares 178,310,000

Earnings Per Share – Diluted

2013 (estimate) $3.73
2012 $4.89
2011 $7.67
2010 $6.76
2009 $6.39
2008 $6.20
2007 $5.60
2006 $5.36
2005 $4.40
2004 $3.93
2003 $3.42
2002 $2.64

Earnings Per Share – Modern Graham (Calculating EPSmg)

2013 (estimate) $5.41
2012 $6.29
2011 $6.84
2010 $6.30
2009 $5.91
2008 $5.48

Conclusion:

Entergy Corporation fails to pass the requirements for either the Defensive Investor or the Enterprising Investor.  The company’s current ratio is too low for either investor type and the earnings growth have not been strong.  The EPSmg (normalized earnings) in 2008 was $5.48 and will only be an estimated $5.41 in 2013.  As a result, value investors following Benjamin Graham’s techniques from The Intelligent Investor should not invest in Entergy at this time unless they find a compelling reason otherwise while doing further research.  From purely a valuation perspective, the company appears to be overvalued at this time as well.  The poor earnings growth history does not support the market’s implied estimate of 1.48% growth, even though that figure is seemingly low.

What do you think?  Is Entergy Corp is overvalued?  Is the company not suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Entergy Corp at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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