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 Psychemedics Corp fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Psychemedics Corporation provides testing services for the detection of abused substances through the analysis of hair samples. The Companyâ€™s testing methods utilize a technology to enzymatically dissolve hair samples and then perform radioimmunoyassays on the hair sampled, with confirmation testing by mass spectrometry. Its primary application of its technology is as a testing service that analyzes hair samples for the presence of certain drugs of abuse. Its tests provide quantitative information that can indicate the approximate amount of drug ingested, as well as historical data, which can show a pattern of individual drug use over a longer period of time providing superior detection compared to other types of drug testing. It provides commercial testing and confirmation by mass spectrometry using industry-accepted practices for cocaine, marijuana, phencyclidine (PCP), methamphetamine and opiates. Testing services are performed at its laboratory in Culver City, California.
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 – FAIL
- 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 – 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 = 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||$8.87|
|Value Based on 0% Growth||$5.20|
|Market Implied Growth Rate||10.19%|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Psychemedics Corp is a very small company that is not suitable for the Defensive Investor but does pass all of the requirements of the Enterprising Investor. Â While the small size of the company is not enough to eliminate it from contention for the Defensive Investor, the company also has not shown sufficient earnings growth over the ten year period and has high PEmg and PB ratios. Â As a result,Â Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company as well as other opportunities, including a review ofÂ 5 Undervalued Companies for the Enterprising InvestorÂ and 5 Low PEmg Companies for the Enterprising Investor. Â From a valuation perspective, the company appears to be overvalued currently, after growing its EPSmg (normalized earnings) from $0.60 in 2009 to only $0.61 in 2013. Â This very low level of demonstrated growth does not support the market’s implied estimate of 10.19% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below 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 Psychemedics Corp (PMD)? 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 Psychemedics Corp (PMD) 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.