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 the 5 Undervalued Companies for the Defensive 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 Verisign Inc. (VRSN) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): VeriSign, Inc. (VeriSign) is a provider of Internet infrastructure services. The Company provides network confidence and availability for mission-critical Internet services, such as domain name registry services and infrastructure assurance services. Its service capabilities enable real-time name resolution for a number of global top level domains (TLDs), enable domain name registration through registrars, and provide security intelligence and cloud-based network availability services to enterprise customers. It has one reportable segment is Naming Services, which consists of Registry Services and Network Intelligence and Availability (NIA) Services. It has operations inside as well as outside the United States (U.S.). Registry Services operates the authoritative directory of all .com, .net, .cc, .tv, and .name domain names and the back-end systems for all .gov, .jobs and .edu domain names.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- 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 – PASS
- 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 = 2/5
- 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 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$32.62|
|Value Based on 0% Growth||$19.12|
|Market Implied Growth Rate||7.14%|
|Net Current Asset Value (NCAV)||-$9.67|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Verisign does not satisfy either the Defensive Investor or the Enterprising Investor. The Defensive Investor has concerns with the poor current ratio, lack of earnings stability or dividend payments, and the high PEmg and PB ratios. The Enterprising Investor has issues with the high level of debt, and the lack of dividend payments. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.52 in 2010 to an estimated $2.25 for 2014. This level of demonstrated growth outpaces the market’s implied estimate of 7.14% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the market price at this time.
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 Verisign Inc. (VRSN)? 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 Verisign (VRSN) 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.