Public Service Enterprise Group Inc. Annual Valuation – 2014 $PEG

220px-Alternate_logo_for_Public_Service_Electric_and_Gas_CompanyBenjamin 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 Highest Dividend Yields Among Undervalued Companies for the Enterprising Investor.  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 Public Service Enterprise Group (PEG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Public Service Enterprise Group Incorporated (PSEG) is an energy company. The Company’s operations are located primarily in the Northeastern and Mid- Atlantic United States. PSEG conducts its business through three direct wholly owned subsidiaries: PSEG Power LLC (Power), Public Service Electric and Gas Company (PSE&G) and PSEG Energy Holdings L.L.C. (Energy Holdings). Power integrates its generating asset operations with its wholesale energy sales, fuel supply and energy trading functions. PSE&G is a franchised public utility in New Jersey. It is also the provider of last resort for gas and electric commodity service for end users in its service territory. Energy Holdings invests and operates through its two primary subsidiaries. In December 2013, Canadian Solar Inc’s subsidiary, CSI Holdco LLC sold two utility-scale solar power plants totaling 4.4 mega watts DC to Public Service Enterprise Group Inc subsidiary, PSEG Solar Source.

PEG Chart

PEG data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  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 - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  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 = 2/5

  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 – FAIL

Valuation Summary

Key Data:

Recent Price $39.45
MG Value $19.55
MG Opinion Overvalued
Value Based on 3% Growth $37.74
Value Based on 0% Growth $22.12
Market Implied Growth Rate 3.33%
Net Current Asset Value (NCAV) -$34.94
PEmg 15.16
Current Ratio 1.15
PB Ratio 1.69

Balance Sheet – 3/31/2014

Current Assets $3,853,000,000
Current Liabilities $3,357,000,000
Total Debt $7,802,000,000
Total Assets $33,326,000,000
Intangible Assets $64,000,000
Total Liabilities $21,527,000,000
Outstanding Shares 505,880,000

Earnings Per Share

2014 (estimate) $2.62
2013 $2.45
2012 $2.51
2011 $2.77
2010 $3.07
2009 $3.14
2008 $1.93
2007 $2.59
2006 $1.49
2005 $1.76
2004 $1.52

Earnings Per Share – ModernGraham

2014 (estimate) $2.60
2013 $2.66
2012 $2.74
2011 $2.80
2010 $2.69
2009 $2.40

Dividend History

PEG Dividend Chart

PEG Dividend data by YCharts


Public Service Enterprise Group does not satisfy either the Defensive Investor or the Enterprising Investor’s requirements.  The Defensive Investor has concerns with the low current ratio, and the insufficient earnings growth over the last ten years.  The Enterprising Investor is concerned with the level of debt relative to the current assets, and the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation perspective, the company appears to be significantly overvalued after seeing its EPSmg (normalized earnings) drop from $2.69 in 2010 to only an estimated $2.60 for 2014.  This demonstrated drop in earnings does not support the market’s implied estimate of 3.33% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the 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 Public Service Enterprise Group (PEG)?  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 Public Service Enterprise Group (PEG) or in 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 for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.






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