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 for the EnterprisingÂ Investor Near 52 Week Lows.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 Consolidated Edison (ED)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Consolidated Edison, Inc. (Con Edison) is a holding company, which owns Consolidated Edison Company of New York, Inc. (CECONY), which delivers electricity, natural gas and steam to customers in New York City and Westchester County; Orange and Rockland Utilities, Inc. (O&R) (together with CECONY referred to as the Utilities), which delivers electricity and natural gas to customers primarily located in southeastern New York, and northern New Jersey and northeastern Pennsylvania, and competitive energy businesses, which provide retail and wholesale electricity supply and energy services. CECONYâ€™s business operations are its regulated electric, gas and steam delivery businesses. O&Râ€™s business operations are its regulated electric and gas delivery businesses. In July 2012, Consolidated Edison Development, a wholly owned subsidiary of Con Edison, and GCL Solar Energy Inc., a wholly owned subsidiary of GCL-Poly Energy Holdings Limited, acquired two solar photovoltaic projects.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- 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 -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 – FAIL
- 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 = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â 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 – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$53.20|
|Value Based on 0% Growth||$31.18|
|Market-Implied Growth Rate||3.15%|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Consolidated EdisonÂ is not suitable for either the Defensive Investor or the Enterprising Investor at this time. Â The Defensive Investor has concerns with the low current ratio and the lack of sufficient earnings growth over the last ten years while the Enterprising Investor is concerned with the high level of debt relative to current assets. Â As a result,Â value investors following the ModernGraham approach based on Benjamin Graham’s methods should seek other opportunities. Â As for a valuation, the company appears significantly overvalued after growingÂ its EPSmg (normalized earnings) from $3.32Â in 2010 to only an estimated $3.67 for 2014. Â This low level of demonstrated growthÂ does not support the market’s implied estimate of 3.15% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula,Â to return an estimate of intrinsic value belowÂ 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 Consolidated Edison (ED)? 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.
Be sure to review the previousÂ ModernGraham Valuations of Consolidated Edison (ED)!
Disclaimer: Â The author did not hold a position in Consolidated Edison (ED) 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.