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 theÂ EnterprisingÂ Investor Near 52 Week Lows.Â 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 Roper Industries (ROP)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Roper Industries, Inc. (Roper) designs, manufactures and distributes radio frequency (RF) products, services and application software, industrial technology products, energy systems and controls and medical and scientific imaging products and software. The Company markets these products and services to a range of markets, including RF applications, medical, water, energy, research, education, software-as-a-service (SaaS)-based information networks, security and other niche markets. The Company operates in four segments: Medical and Scientific Imaging, Energy Systems and Controls, Industrial Technology and RF Technology. On August 22, 2012, the Company acquired Sunquest Information Systems, Inc. (Sunquest), a provider of diagnostic and laboratory software solutions to healthcare providers. In May 2013, Roper Industries Inc acquired Managed Health Care Associates Inc.
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 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – 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 – PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â 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 = 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 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$76.83|
|Value Based on 0% Growth||$45.04|
|Market Implied Growth Rate||9.39%|
|Net Current Asset Value (NCAV)||-$24.05|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Roper IndustriesÂ qualifiesÂ for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the high PEmg and PB ratios while the Enterprising Investor is only concerned by the high level of debt relative to the net current assets. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. From a valuation side of things, the company appears to be fairlyÂ valued after growing its EPSmg (normalized earnings) from $2.91 in 2010 to an estimated $5.30 for 2014. This level of demonstrated growth supportsÂ the marketâ€™s implied estimate of 9.39% earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative toÂ the 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 Roper Industries (ROP)? 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 Roper Industries (ROP)Â orÂ 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. Â Logo taken from wikipedia or the company website for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.