ADT Corporation 2014 Annual Valuation $ADT

200px-ADT_Security_Services_Logo.svgBenjamin 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 the 5 Lowest PEmg Comapnies for Defensive Investors.  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 ADT Corporation (ADT) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The ADT Corporation (ADT) is a provider of electronic security, interactive home and business automation, and monitoring services for residences and small businesses in the United States and Canada. The Company’s products and services include home and business solutions, and home health services. The Company’s brands include ADT, ADT Pulse and Companion Service. As of September 31, 2013, the Company offers a variety of alternate and back-up alarm transmission methods including cellular, digital radio and broadband Internet. On August 2, 2013, the Company acquired Devcon Security Holdings, Inc. In November 2013, Kastle Systems International announced that it had acquired Mutual Central Alarm Services and Stat-Land Security Systems from ADT Corporation.

ADT Chart

ADT data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. 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 = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $32.89
MG Value $66.27
MG Opinion Undervalued
Value Based on 3% Growth $24.96
Value Based on 0% Growth $14.63
Market Implied Growth Rate 5.30%
Net Current Asset Value (NCAV) -$35.35
PEmg 19.11
Current Ratio 1.04
PB Ratio 1.87

Balance Sheet – 3/28/2014

Current Assets $764,000,000
Current Liabilities $732,000,000
Total Debt $4,712,000,000
Total Assets $10,147,000,000
Intangible Assets $6,292,000,000
Total Liabilities $7,025,000,000
Outstanding Shares 177,110,000

Earnings Per Share

2014 (estimate) $1.82
2013 $1.88
2012 $1.67
2011 $1.59
2010 $1.01
2009 $1.03
2008 $0.94
2007 $0.00
2006 $0.00
2005 $0.00
2004 $0.00

Earnings Per Share – ModernGraham

2014 (estimate) $1.72
2013 $1.59
2012 $1.38
2011 $1.13
2010 $0.80
2009 $0.59

Dividend History

ADT Dividend Chart

ADT Dividend data by YCharts


ADT Corporation does not qualify for either the Defensive Investor or the Enterprising Investor.  The company’s history as a publicly traded company is not long enough for the Defensive Investor, and 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 the ModernGraham Valuation Index.  From a valuation perspective, the company appears undervalued after growing its EPSmg (normalized earnings) from $0.80 in 2010 to an estimated $1.72 for 2014.  This level of demonstrated growth surpasses the market’s implied estimate of 5.3% 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.  What do you think?  What value would you put on ADT Corporation (ADT)?  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.

Disclaimer:  The author did not hold a position in ADT Corporation (ADT) 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.

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