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. 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 Tripadvisor Inc. (TRIP) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): TripAdvisor, Inc. (TripAdvisor) is an online travel research company, enabling users to plan and have a trip. TripAdvisor features reviews and advice on hotels, resorts, flights, vacation rentals, vacation packages and travel guides. TripAdvisor’s travel research platform features reviews and opinions from its community of travelers about destinations, accommodations (hotels, bed and breakfasts, specialty lodging and vacation rentals), restaurants and activities worldwide, through its TripAdvisor brand. TripAdvisor Websites include tripadvisor.com in the United States and versions of the Website in 30 countries, including in China under the brand daodao.com. In May 2014, the Company acquired Vacation Home Rentals, a Massachusetts-based vacation rentals Website. In May 2014, the Company acquired London-based Tripbod, travel community. In August 2014, the Company acquired Viator.
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 – PASS
- 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 – 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 – 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 – PASS
|Value Based on 3% Growth||$20.96|
|Value Based on 0% Growth||$12.29|
|Market Implied Growth Rate||29.43%|
|Net Current Asset Value (NCAV)||$0.35|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Tripadvisor does not pay a dividend.
Tripadvisor does not qualify for the Defensive Investor but does satisfy the Enterprising Investor. The Defensive Investor is concerned by the short earnings history, lack of dividend payments, and high PEmg and PB ratios. The Enterprising Investor’s only initial concern is the lack of dividend payments. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.55 in 2010 to an estimated $1.45 for 2014. This level of demonstrated growth does not support the market’s implied estimate of 29.43% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value 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 Tripadvisor Inc. (TRIP)? 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 Tripadvisor Inc. (TRIP) 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.