Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is 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 or by reviewing 5 Undervalued Companies for the Defensive Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how PG&E Corp. fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): PG&E Corporation is a holding company that conducts its business through Pacific Gas and Electric Company (Utility). The Utility’s revenues are generated mainly through the sale and delivery of electricity and natural gas to customers. The Utility served approximately 5.2 million electricity distribution customers and approximately 4.4 million natural gas distribution customers at December 31, 2012. The Utility’s rates for electricity and natural gas utility services are based on its costs of providing service (cost-of-service ratemaking). The Utility is regulated primarily by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC). In addition, the Nuclear Regulatory Commission (NRC) oversees the licensing, construction, operation, and decommissioning of the Utility’s nuclear generation facilities. During the year ended December 31, 2012, the Company delivered 76,205 gigawatts per hour of Actual Electricity.
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 – FAIL
- 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 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- 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 – FAIL
|Value Based on 3% Growth||$30.90|
|Value Based on 0% Growth||$18.12|
|Market Implied Growth Rate||6.24%|
|Net Current Asset Value (NCAV)||-$77.27|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
PG&E is not suitable for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company has a low current ratio, not a stable enough dividend history (the company did not pay a dividend in 2004), has not shown sufficient growth in earnings over the ten year period, and has a high PEmg ratio. For the Enterprising Investor, the company holds too much debt relative to current assets, and has not shown growth in the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities for investment through a review of 5 Low PEmg Companies for the Defensive Investor and 5 Low PEmg Companies for the Enterprising Investor. From a valuation standpoint, the lack of growth in EPSmg (normalized earnings) is very concerning as the demonstrated growth does not support the market’s implied estimate of 6.24% earnings growth. The ModernGraham valuation model has indicated the intrinsic value is well below the market price at this time.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on PG&E Corp (PCG)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author did not hold a position in PG&E Corp (PCG) 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.