Williams Companies (WMB) Annual Valuation

 

The energy sector can be a tricky one for value investors following Benjamin Graham methods.  On one hand, energy companies often offer strong dividends, which is a cornerstone of any Intelligent Investor’s portfolio qualities.  But on the other hand, there is often limited growth in the earnings, which brings into question (1) whether the dividends will be able to stand up to the threat of inflation, and (2) whether the investment will miss out on capital gains if the company is failing to grow.  As a result, it is critical to examine an energy company through the same lens as other industries, in order to accurately compare the companies as potential investments.  By using a ModernGraham analysis, one can maintain a systematic analysis across companies and even industries to easily compare one potential investment’s risk level and opportunity for value against another potential investment.  What follows is a specific look at how Williams Companies fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Williams Companies, Inc. (Williams) is an energy infrastructure company focused on connecting North America’s hydrocarbon resource plays to markets for natural gas, natural gas liquids (NGLs), and olefins. Its operations span from the deepwater Gulf of Mexico to the Canadian oil sands. It operates in three segments: Williams Partners, Midstream Canada & Olefins and Other. Its interstate gas pipeline and domestic midstream interests are held through its investment in Williams Partners L.P. (WPZ). It owns the general-partner interest and a 70% limited-partner interest in WPZ. Williams also owns a Canadian midstream and domestic olefins production business, which processes oil sands off-gas and produces olefins for petrochemical feedstocks. In November 2012, Williams Partners LP acquired Williams Companies Inc’s approximately 83% interest in the Geismar olefins production facility In December 2012, it acquired Access Midstream Partners GP, L.L.C. and Access Midstream Partners LP.

Defensive and Enterprising Investor Tests:

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

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 – FAIL
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 – PASS
6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 1/5

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 – FAIL
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary

Key Data:

MG Opinion	Overvalued
Value Based on 3% Growth	$9.45
Value Based on 0% Growth	$5.54
Market Implied Growth Rate	25.63%
Net Current Asset Value (NCAV)	-$28.88
PEmg	59.77
Current Ratio	0.85
PB Ratio	5.38

Balance Sheet – 9/30/2013 

Current Assets	$1,782,000,000
Current Liabilities	$2,086,000,000
Total Debt	$10,359,000,000
Total Assets	$26,455,000,000
Intangible Assets	$2,305,000,000
Total Liabilities	$21,507,000,000
Outstanding Shares	683,000,000

Earnings Per Share

2013 (estimate)	$0.83
2012	$1.15
2011	$1.34
2010	-$1.87
2009	$0.75
2008	$2.26
2007	$1.40
2006	$0.55
2005	$0.53
2004	$0.18
1999	-$0.03

Earnings Per Share – ModernGraham 

2013 (estimate)	$0.65
2012	$0.62
2011	$0.49
2010	$0.25
2009	$1.24
2008	$1.32

Conclusion:

Williams Companies has one strong quality, and that is the high dividend yield.  However, Defensive Investors and Enterprising Investors will not be interested in the company as it does not pass their requirements.  The Defensive Investor will be off-put by the poor current ratio, lack of earnings stability over the ten year period, and high PEmg and PB ratios.  The company similarly fails the requirements of the Enterprising Investor because of the high debt relative to current assets, the lack of earnings stability over the five year period, and the lack of earnings growth over the five year period.  Therefore, value investors seeking to follow Benjamin Graham’s methods may wish to seek out other opportunities, such as by reviewing the ModernGraham valuation of Exxon Mobil (XOM).  From a valuation perspective, the company’s EPSmg (normalized earnings) have dropped from $1.32 in 2008 to an estimated $0.65 for 2013.  This lack of growth raises concerns over whether the company will be able to maintain growth in order to continue to grow its dividend over time, and whether the company presents an opportunity for capital gains on investment.  Due to the lack of growth, the ModernGraham valuation model returns a poor valuation that is nowhere near what the market price is currently.  As a result, the company would appear to be overvalued.

What do you think?  What value would you put on Williams Companies (WMB)?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

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Disclaimer:  The author did not hold a position in Williams Companies (WMB) 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.

Logo taken from the company’s website; this article is not affiliated with the company in any manner.