Harman International Industries (HAR) Quarterly Valuation

Investors can often get wrapped up in speculating about a company’s prospects, and the market can sometimes see very great swings in price based on analyst estimates being right or wrong.  This week that was very true for Harman International, as the company posted earnings results that were significantly higher than had been estimated.  However, it is critical for Intelligent Investors to base decisions on historical results, with minimal reliance on estimates because of how unreliable they tend to be.  Intelligent Investors will seek to avoid some of the speculating about these issues and insist upon seeing the actual financial results of the companies.  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.  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 specific look at how Harman International Industries fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Harman International Industries, Incorporated (Harman International) is engaged in the developing, manufacturing and marketing of audio products and electronic systems. The Company has developed a range of product offerings, which are sold under brand names like AKG, Crown, JBL, Infinity, Harman/Kardon, Lexicon, dbx, Digitec, BSS, Studer, Soundcraft, Mark Levinson, Becker, Revel, Logic 7 and Selenium. The Company has four segments: Infotainment, Lifestyle, Professional, and Other. On February 28, 2013, the Company acquired Martin Professional A/S from A/S Schouw & Co. In October 2013, the Company announced the acquisition of privately-held Duran Audio BV.

HAR data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7

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 – FAIL
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 – 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 = 5/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
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 – PASS

Valuation Summary

Key Data:

MG Value	$119.66
MG Opinion	Fairly Valued
Value Based on 3% Growth	$45.07
Value Based on 0% Growth	$26.42
Market Implied Growth Rate	12.39%
Net Current Asset Value (NCAV)	$7.43
PEmg	33.28
Current Ratio	1.81
PB Ratio	4.17

Balance Sheet – 9/30/2013

Current Assets	$2,308,100,000
Current Liabilities	$1,272,400,000
Total Debt	$240,000,000
Total Assets	$3,485,900,000
Intangible Assets	$251,400,000
Total Liabilities	$1,805,000,000
Outstanding Shares	67,740,000

Earnings Per Share

2014 (estimate)	$4.09
2013	$2.04
2012	$4.57
2011	$1.90
2010	$0.50
2009	-$7.19
2008	$1.73
2007	$4.72
2006	$3.75
2005	$3.31
2004	$2.27

Earnings Per Share – ModernGraham 

2014 (estimate)	$3.11
2013	$1.87
2012	$1.29
2011	-$0.13
2010	-$0.53
2009	-$0.27

Dividend History

HAR Dividend data by YCharts

Conclusion:

Harman International Industries performs fairly well in the ModernGraham system.  The company is not suitable for Defensive Investors, after failing every requirement other than the market cap, but is suitable for Enterprising Investors, who are capable of undertaking substantial research and accepting slightly more risk.  The company passes all five of the requirements of the Enterprising Investor, and these value investors seeking to follow Benjamin Graham’s methods should feel comfortable proceeding with further research, such as a review of ModernGraham’s valuation of Apple (AAPL).  From a valuation perspective, the ModernGraham valuation model returns an intrinsic value that indicates the market price is within the margin of safety.  The company’s EPSmg (normalized earnings) have grown from -$0.53 in 2010 to an estimated $3.11 for 2013.  This strong level of growth is in line with the market’s implied estimate of 12.39%.  Therefore, the company is fairly valued.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Harman International Industries (HAR)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Harman International Industries (HAR) 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 Wikipedia; this article is not affiliated with the company in any manner.