Spectra Energy Corp (SE) Annual Valuation – 2014
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 Spectra Energy (SE) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Spectra Energy Corp (Spectra Energy) through its subsidiaries and equity affiliates, owns and operates a portfolio of complementary natural gas-related energy assets and is a natural gas infrastructure company. Spectra Energy operates in three areas of the natural gas industry: gathering and processing, transmission and storage, and distribution. The Company operates in four segments: U.S. Transmission, Distribution, Western Canada Transmission & Processing, and Field Services. It provides transportation and storage of natural gas to customers in various regions of the United States and Canada. Effective March 14, 2013, the Company acquired the interest of Express-Platte Pipeline System. Effective August 2, 2013, Spectra Energy Partners LP, a 61%-owned unit of Spectra Energy Corp, acquired a 50% interest in Express-Platte Pipeline System, a wholly owned unit of Spectra Energy.
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
Valuation Summary
Key Data:
| Recent Price | $38.80 |
| MG Value | $26.03 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $22.51 |
| Value Based on 0% Growth | $13.20 |
| Market Implied Growth Rate | 8.24% |
| Net Current Asset Value (NCAV) | -$34.27 |
| PEmg | 24.99 |
| Current Ratio | 0.52 |
| PB Ratio | 3.06 |
Balance Sheet – 12/31/2013
| Current Assets | $2,081,000,000 |
| Current Liabilities | $4,039,000,000 |
| Total Debt | $12,488,000,000 |
| Total Assets | $33,533,000,000 |
| Intangible Assets | $4,810,000,000 |
| Total Liabilities | $25,039,000,000 |
| Outstanding Shares | 670,000,000 |
Earnings Per Share
| 2013 | $1.55 |
| 2012 | $1.43 |
| 2011 | $1.77 |
| 2010 | $1.60 |
| 2009 | $1.31 |
| 2008 | $1.81 |
| 2007 | $1.49 |
Earnings Per Share – ModernGraham
| 2013 | $1.55 |
| 2012 | $1.56 |
| 2011 | $1.62 |
| 2010 | $1.44 |
| 2009 | $1.22 |
| 2008 | $1.00 |
Dividend History
SE Dividend data by YCharts
Conclusion:
Spectra Energy does not qualify for either the Defensive Investor or the Enterprising Investor.  The only requirement of the Defensive Investor that the company passes is the market size while the Enterprising Investor is concerned with the high level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Exxon Mobil (XOM) and 5 Outstanding Dow Components.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.22 in 2009 to only $1.55 in 2013.  This low level of demonstrated growth does not support the market’s implied estimate of 8.24% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is below the market price.
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 Spectra Energy Corp (SE)?  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: Â The author did not hold a position in Spectra Energy Corp (SE) 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.
