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 Waters Corporation fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Waters Corporation (Waters) is an analytical instrument manufacturer that primarily designs, manufactures, sells and services, through its Waters Division, high performance liquid chromatography (HPLC), ultra performance liquid chromatography (UPLC and together with HPLC, referred to as LC) and mass spectrometry (MS) technology systems and support products, including chromatography columns, other consumable products and post-warranty service plans. Through its TA Division, the Company primarily designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments. The Company is also a developer and supplier of software-based products that interface with the Company’s instruments and are typically purchased by customers as part of the instrument system. The Company operates in two segments: Waters Division and TA Division. In January 2012, the Company acquired Baehr Thermoanalyse GmbH. In July 2012, the Company acquired Blue Reference, Inc.
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 – PASS
- 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 – FAIL
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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 = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$69.88|
|Value Based on 0% Growth||$40.96|
|Market Implied Growth Rate||7.43%|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Waters Corporation is not suitable for the Defensive Investor because it does not pay a dividend and is currently trading at high PEmg and PB ratios. Â The Enterprising Investor is willing to overlook the lack of a dividend payment, however, because the company passes all of the investor type’s other requirements. Â As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company. Â further research should also include a review of other opportunities, such as through a review of 5 Low PEmg Companies for the Enterprising Investor and 5 Undervalued Companies for the Enterprising Investor. Â As for a valuation, the company has grown its EPSmg (normalized earnings) from $2.89 in 2009 to $4.82, an impressive level of demonstrated historical growth that supports the market’s implied estimate of earnings growth of 7.43%. Â Accordingly, the ModernGraham valuation model returns an estimate of intrinsic value that is within a margin of safety relative to the market price, and the company appears to be fairly valued.
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 Waters Corporation (WAT)? 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 Waters Corporation (WAT) 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.