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 Xcel Energy fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Xcel Energy Inc. is a holding company with subsidiaries engaged primarily in the utility business. During the year ended December 31, 2012, the Companyâ€™s operations included the activity of four wholly owned utility subsidiaries that serve electric and natural gas customers in eight states. These utility subsidiaries are NSP-Minnesota, NSP-Wisconsin, PSCo and SPS, and serve customers in portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin. Along with WYCO, a joint venture formed with CIG to develop and lease natural gas pipelines, storage, and compression facilities, and WGI, an interstate natural gas pipeline company, these companies comprise the continuing regulated utility operations.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- 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 – PASS
- 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
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$25.93|
|Value Based on 0% Growth||$15.20|
|Market Implied Growth Rate||4.15%|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Xcel Energy Inc. is a very intriguing utility company, having passed every requirement of the Defensive Investor except the current ratio requirement. It also qualifies for the Enterprising Investor by default because it is suitable for Defensive Investors, despite having a level of debt relative to its current assets that normally turns Enterprising Investors away. Â As a result,Â value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable researching the company further. Â One example of further research may to be review a list ofÂ 5 Undervalued Companies for the Defensive InvestorÂ orÂ 5 Low PEmg Companies for the Defensive Investor. Â From a valuation perspective, the company appears to be fairly valued, having grown its EPSmg (normalized earnings) from $1.42 in 2009 to $1.79 in 2013. Â This level of historically demonstrated growth supports the market’s implied estimate of earnings growth of 4.15%, leading the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the market 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 Xcel Energy Inc. (XEL)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ 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 Xcel Energy Inc. (XEL) 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.