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 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 Ameren Corporation (AEE) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Ameren Corporation (Ameren) is a utility holding company. The Company’s principal subsidiaries are Union Electric Company (Ameren Missouri) and Ameren Illinois Company (Ameren Illinois). The Company’s segments include Ameren Missouri and Ameren Illinois. Ameren Missouri operates a rate-regulated electric generation, transmission and distribution business, and a rate-regulated natural gas transmission and distribution business in Missouri. Ameren Illinois operates a rate-regulated electric and natural gas transmission and distribution business in Illinois. AER consists of non-rate-regulated operations, including Ameren Energy Generating Company (Genco), AmerenEnergy Resources Generating Company (AERG) and Ameren Energy Marketing Company (Marketing Company). In December 2013, the Company announced that it has completed the divestiture of its merchant generation business, formerly known as Ameren Energy Resources Company, LLC (AER).
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 – 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 – 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 = 1/5
- 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 – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$12.28|
|Value Based on 0% Growth||$7.20|
|Market Implied Growth Rate||18.56%|
|Net Current Asset Value (NCAV)||-$52.82|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Ameren Corporation is not suitable for either Defensive Investors or Enterprising Investors. The company’s high level of debt is a concern for both investor types along with the instability in earnings, and lack of earnings growth. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As far as a valuation is concerned, the company is grossly overvalued based on the drop in EPSmg (normalized earnings) from $2.09 in 2010 to an estimated $0.85 for 2014. Clearly this does not support the market’s implied estimate of 18.56% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value well 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 Ameren Corporation (AEE)? 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 Ameren Corporation (AEE) 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.