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 reviewing theÂ 5 Undervalued Companies with a High Beta.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 L3 Communications (NYSE:LLL)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â L-3 Communications Holdings, Inc. is a prime contractor in aerospace systems and national security solutions. The Company is also a provider of a range of communication and electronic systems and products used on military and commercial platforms. The Company operates in four segments: Aerospace Systems, Electronic Systems, Communication Systems and National Security Solutions.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- 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 = 4/5
- 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 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$121.37|
|Value Based on 0% Growth||$71.15|
|Market Implied Growth Rate||2.99%|
|Net Current Asset Value (NCAV)||-$37.87|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
L3 Communications is suitable for either Defensive Investors or Enterprising Investors. Â The Defensive Investor’s only concern is the current ratio, while the Enterprising Investor is concerned with the high level of debt relative to the net current assets. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods, should feel comfortable conducting further research into the company. Â From a valuation side of things, the company appears overvalued after growing its EPSmg (normalized earnings) from $7.37 in 2010 to only an estimated $8.37 for 2014. Â This low level of demonstrated growth does not support the market’s implied estimate of 2.99% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below 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 L3 Communications (LLL)? 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.
Disclaimer: Â The author did not hold a position in L3 Communications (LLL) or any other company mentioned in this 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.