Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ 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. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Baxter International fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Pitney Bowes Inc. is a global provider of software, hardware and services to enable both physical and digital communications and to integrate those physical and digital communications channels. The Company offers a range of equipment, supplies, software, services and solutions for managing and integrating physical and digital communication channels. It conducts its business activities in seven reporting segments within two business groups: Small & Medium Business Solutions (SMB Solutions) and Enterprise Business Solutions (EB Solutions). It maintains field service organizations to provide servicing for customersâ€™ equipment, usually in the form of annual maintenance contracts. It establishes credit approval limits and procedures of the customer and the type of product or service provided to control risk in extending credit to customers. In February 12, 2014, Pitney Bowes Inc acquired the remaining 30% interest in Pitney Bowes Semco Equipamentos e Servicos Ltda.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- 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 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- 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 – FAIL
|Value Based on 3% Growth||$25.48|
|Value Based on 0% Growth||$14.94|
|Market Implied Growth Rate||2.89%|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Pitney Bowes is not suitable for either the Defensive Investor or the Enterprising Investor. Â For the Defensive Investor, the company’s current ratio is too low, there has not been sufficient earnings growth over the ten year historical period, and the PB ratio is too high. Â For the Enterprising Investor, there is too much debt relative to the current assets and there has been insufficient earnings growth over the five year historical period. Â As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should seek other opportunities, such as by reviewing 5 Low PEmg Companies for the Defensive Investor. Â From a valuation side of things, the company appears overvalued after seeing its EPSmg (normalized earnings) fall from $2.07 in 2009 to $1.76 for 2013. Â This lack of growth clearly does not support the market’s implied estimate of earnings growth of 2.89%, and the ModernGraham valuation model returns an intrinsic value estimate that is much lower than the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Pitney Bowes (PBI)? Â Where do you see the company going in the future? 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 Pitney Bowes (PBI) 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.