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 companyÂ or by reviewingÂ 5 Undervalued Companies for the Defensive Investor.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 Interpublic Group of Companies (IPG) fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â The Interpublic Group of Companies, Inc. (Interpublic) is a global advertising and marketing services companies. Interpublicâ€™s companies specialize in consumer advertising, digital marketing, communications planning and media buying, public relations and specialized communications disciplines. The Company has two segments: Integrated Agency Networks (IAN) and Constituency Management Group (CMG). IAN is comprised of McCann, Draftfcb, Lowe, Mediabrands and its domestic integrated agencies. CMG is comprised of a number of its specialist marketing services offerings. In January 2014, Interpublic Group of Companies Inc announced that its division Lowe and Partners, announced the acquisition of the global digital network Profero.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7
- 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 – 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 – 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||$10.30|
|Value Based on 0% Growth||$6.04|
|Market Implied Growth Rate||7.22%|
|Net Current Asset Value (NCAV)||-$6.14|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Interpublic Group of Companies is not suitable for either the Defensive Investor or the Enterprising Investor. Â For the Defensive Investor, the company has a poor current ratio, has shown insufficient earnings stability or growth over the ten year historical period, does not pay dividends, and is trading at a high PEmg ratio. Â For the Enterprising Investor, the company has too much debt relative to its current assets. Â As a result, value investorsÂ following theÂ ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of Glance at the Dow and 5 Low PEmg Companies for the Enterprising Investor. Â From a valuation standpoint, the company appears undervalued after having grown its EPSmg (normalized earnings) from $0.18 in 2009 to $0.71 for 2013. Â This level of demonstrated growth outpaces the market’s implied estimate of 7.22% 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 Interpublic Group of Companies (IPG)? 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 Interpublic Group of Companies (IPG) 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.