Southern Company is ultimately a power company, and many investors will change their approach to analysis based on what they believe to be standards within the industry. Â Using a ModernGraham analysis, one can maintain a systematic analysis across industries to easily compare one potential investment’s risk level and opportunity for value against another potential investment. Â What follows is a specific look at how Southern Company fares in the ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â The Southern Company (Southern Company)is a holding company, which owns all of the common stock of the traditional operating companies, including Alabama Power Company (Alabama Power), Georgia Power Company (Georgia Power), Gulf Power Company (Gulf Power), and Mississippi Power Company (Mississippi Power) ,and Southern Power Company (Southern Power), and other direct and indirect subsidiaries (together, the Southern Company system). The primary business of the Southern Company system is electricity sales by the traditional operating companies and Southern Power. The four traditional operating companies are vertically integrated utilities providing electric service in four Southeastern states. Southern Power constructs, acquires, owns, and manages generation assets. In July 2012, the Company and Turner Renewable Energy acquired a 20 megawatts solar photovoltaic power plant in Nevada from SunEdison, a subsidiary of MEMC Electronic Materials, Inc.
Defensive and Enterprising Investor Tests:
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- 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 = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$33.17|
|Value Based on 0% Growth||$19.44|
|Market Implied Growth Rate||4.81%|
|Net Current Asset Value (NCAV)||-$45.51|
Balance Sheet – 9/30/2013Â
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
The Southern Company would be a much more intriguing company if it achieved more sufficient growth. Â As it stands, it is not suitable for the Defensive Investor because it has failed to adequately grow its earnings over the ten year period, and its current ratio is far too low. Â In addition, the level of debt relative to the current assets is too high for the Enterprising Investor. Â Value investors wishing to follow Benjamin Graham’s methods may want to look at other opportunities, such as by reviewing a list of companies that pass the ModernGraham requirements. Â From a valuation perspective, the company has only grown its EPSmg (normalized earnings) from $2.14 in 2009 to an estimated $2.29 for 2013. Â This is a very low level of growth that does not even support the market’s implied estimate of 4.81% growth. Â As a result, the company would appear to be overvalued based on the ModernGraham valuation model. Â The company does have a strong dividend yield, though, and if investors are willing to take on more risk than value investors typically accept, there may be justification for investment. Â However, the question remains if the company is unable to grow its earnings adequately, how is it going to grow its dividends over the long-term?
What do you think? Â What value would you put on The Southern Company (SO)? Â Is the company not suitable for Defensive Investors and Enterprising Investors? Â Is there a company you like better? Â Leave a comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in The Southern Company (SO) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Photo Credit: Â Andrew Magill