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 Coca-Cola Enterprises fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Coca-Cola Enterprises, Inc. (CCE) markets, produces, and distributes nonalcoholic beverages. The Company serves a market of approximately 170 million consumers throughout Belgium, continental France, Great Britain, Luxembourg, Monaco, the Netherlands, Norway, and Sweden. The Company is The Coca-Cola Companyâ€™s (TCCC) bottling partner in Western Europe and an independent Coca-Cola bottler. The Company and TCCC had entered into 10-year bottling agreements for each of its territories, which extend through October 2, 2020, with each containing the right for it to request a 10-year renewal. During the year ended December 31, 2011, it sold approximately 12 billion bottles and cans (or approximately 620 million physical cases) throughout its territories. During the year ended December 31, 2011, products licensed to the Company through TCCC and its affiliates represented greater than 90% of its volume, with the remainder of its volume being attributable to sales of non-TCCC products.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- 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 – FAIL
- 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||$32.12|
|Value Based on 0% Growth||$18.83|
|Market Implied Growth Rate||6.51%|
|Net Current Asset Value (NCAV)||-$18.16|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Coca-Cola Enterprises does not qualify for either the Defensive Investor or the Enterprising Investor. Â The company does not pass the Defensive Investor’s requirements due to a low current ratio, insufficient earnings stability or growth over the ten year period, and high PEmg and PB ratios. Â The company does not qualify for the Enterprising Investor due to 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 of 5 Low PEmg Companies for the Defensive Investor and 5 Undervalued Companies for the Defensive Investor. Â In terms of a valuation, the company does appear to be undervalued after growing its EPSmg (normalized earnings) from -$1.88 in 2009 to $2.22. Â This demonstrated growth represents a growth level that surpasses the market’s implied estimate of 6.51% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above 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 Coca-Cola Enterprises Inc. (CCE)? 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 Coca-Cola Enterprises Inc. (CCE) or any other company mentioned in the 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.