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 Regal-Beloit fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Regal Beloit Corporation is a global manufacturer of electric motors and controls, electric generators and controls, and mechanical motion control products. The Company operates in two segments: Electrical and Mechanical. Its electrical products include motors used in commercial and residential heating, ventilation, air conditioning ( HVAC) applications, a full line of alternating current ( AC) and direct current ( DC) commercial and industrial electric motors, electric generators and controls, high-performance drives and controls, and capacitors. Its mechanical products include primarily gears and gearboxes, marine transmissions, automotive transmissions, manual valve actuators, and electrical connectivity devices. In February 2014, Regal Beloit Corp acquired Hy-Bon Engineering Company, Inc.
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 – 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 – 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 – FAIL
- 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 = 5/5
- 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 – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$51.70|
|Value Based on 0% Growth||$30.31|
|Market-Implied Growth Rate||6.42%|
Balance Sheet – 12/28/2013
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Regal-Beloit Corporation is suitable for either the Defensive Investor or Enterprising Investor. Â The only test for either investor type that the company did not pass was the Defensive Investor’s PEmg requirement. Â As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research, including a review of 5 Outstanding Dow Components and 5 Low PEmg Companies for the Enterprising Investor. Â From a valuation standpoint, the company does not fare as well after poor growth in EPSmg (normalized earnings) from $3.19 in 2009 to $3.57 for 2013. Â This low level of historically demonstrated growth does not support the market’s current implied estimate of growth of 6.42%, leading the ModernGraham valuation model to return an estimate of intrinsic value that trails 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 Regal-Beloit Corporation (RBC)? 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 Regal-Beloit Corporation (RBC) 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.