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 Enterprising Investor Near 52 Week Lows. 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 E I Du Pont De Nemours and Co. (DD) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Dupont E I De Nemours & Co, formerly E. I. du Pont de Nemours and Company, manufacturing, seed production or selling activities and some are distributors of products manufactured by the Company. The Company’s segments are Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection and Pharmaceuticals. During the year ended December 31, 2011, the Electronics & Communications segment completed the acquisition of Innovalight, Inc., a company specializing in advanced silicon inks and process technologies that increase the efficiency of crystalline silicon solar cells. As of September 22, 2011, it acquired Danisco A/S (Danisco), a global enzyme and specialty food ingredients company. In May 2012, it acquired from Bunge full ownership of the Solae, LLC joint venture. In February 2013, the Company sold DuPont Performance Coatings.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- 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 – 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 – PASS
- 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||$49.92|
|Value Based on 0% Growth||$29.26|
|Market Implied Growth Rate||5.54%|
|Net Current Asset Value (NCAV)||-$11.54|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Du Pont is suitable for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor has concerns with the low current ratio, lack of sufficient earnings growth over the last ten years, and the high PB ratio. The company passes all of the requirements of the Enterprising Investor. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company and its competitors through a review of Dow Chemical (DOW) and Monsanto Company (MON). From a valuation side of things, the company appears to be overvalued after growing EPSmg (normalized earnings) from $2.71 in 2010 to only an estimated $3.44 for 2014. This low level of demonstrated growth does not support the market’s implied estimate of 5.54% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the 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 E I Du Pont de Nemours and Co. (DD)? 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.
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Disclaimer: The author did not hold a position in E I Du Pont de Nemours and Co. (DD) 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.