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 Paccar Inc. fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â PACCAR Inc (PACCAR) is engaged in the design, manufacture and customer support of light, medium- and heavy-duty trucks under the Kenworth, Peterbilt and DAF nameplates. The company also provides customized financial services, information technology and truck parts related to its principal business. The Company operates in three segments: design, manufacture and distribution of light-, medium- and heavy-duty trucks, distribution of parts for the truck aftermarket and related commercial vehicles, and finance and leasing products and services provided to customers and dealers. The Companyâ€™s finance and leasing activities are principally related to Company products and associated equipment. The Companyâ€™s other business is the manufacturing and marketing of industrial winches.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- 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 – 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 = 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
|Value Based on 3% Growth||$39.02|
|Value Based on 0% Growth||$22.88|
|Market Implied Growth Rate||8.27%|
|Net Current Asset Value (NCAV)||-$25.47|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Paccar Inc. does not satisfy the requirements of either the Defensive Investor or the Enterprising Investor. Â The company fails the Defensive Investor’s requirements due to the poor current ratio, lack of sufficient earnings growth over the last ten years, and the high PEmg and PB ratios. Â For the Enterprising Investor, the company fails because of the high level of debt relative to the current assets. Â As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities, through a review ofÂ 5 Undervalued Companies for the Enterprising InvestorÂ and ModernGraham’s valuation of Ford Motor Company (F). Â From a valuation perspective, the company appears to be overvalued, after growing its EPSmg (normalized earnings) from $2.23 in 2009 to $2.69 in 2013. Â This demonstrated level of growth does not support the market’s implied estimate of 8.27% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below a margin of safety relative to the 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 Paccar Inc. (PCAR)? 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 Paccar Inc. (PCAR) 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 Wikipedia; this article is not affiliated with the company in any manner.