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 Defensive Investor with High Dividend Yields.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 Autodesk (ADSK)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Autodesk, Inc. (Autodesk) is a design software and services company, offering customers business solutions through technology products and services. The Company operates in four operating segments: Platform Solutions and Emerging Business (PSEB), Architecture, Engineering and Construction (AEC), Manufacturing (MFG) and Media and Entertainment (M&E). The Company serves customers in the architecture, engineering and construction; manufacturing, and digital media and entertainment industries. In January 2014, Autodesk Inc completed the acquisition of technology and the development team of Circuits.io. In February 2014, Autodesk Inc completed the acquisition of Delcam, one of the suppliers of advanced computer-aided manufacturing (CAM) software. In June 2014, it acquired Stockholm-based Bitsquid AB.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â 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 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 – FAIL
- 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 – 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 -Â PASS
|Value Based on 3% Growth||$13.25|
|Value Based on 0% Growth||$7.77|
|Market Implied Growth Rate||25.42%|
|Net Current Asset Value (NCAV)||$1.01|
Balance Sheet – 4/30/2014
Earnings Per ShareÂ
Earnings Per ShareÂ – ModernGraham
AutodeskÂ qualifies for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor has concernsÂ with the lack of sufficient earnings growth over the last ten years, lack of dividend payments, and the high PEmg and PB ratios. Â Meanwhile, the Enterprising Investor’s only initial concern is the lack of dividend payments. Â As a result, Enterprising InvestorsÂ 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 through a review of ModernGraham’s valuation of Adobe Systems Inc. (ADBE). Â As for a valuation,Â the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.81 in 2011 to only an estimated $0.91 for 2015. Â This low level of demonstrated growth does not supportÂ the market’s implied estimate ofÂ 25.42%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic valueÂ below the price.
Be sure to check out theÂ previousÂ ModernGraham valuations of Autodesk Inc. (ADSK)Â for more perspective!
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 Autodesk (ADSK)? 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 Autodesk (ADSK)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 for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.