CA Incorporated Quarterly Valuation – August 2014 $CA

500px-CA_Technologies_brand.svgBenjamin 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 CA Incorporated (CA) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): CA, Inc. (CA) is an independent enterprise information technology (IT) management software and solutions company. CA develops and delivers software and services. The Company operates in three segments: Mainframe Solutions, Enterprise Solutions and Services. The Company addresses components of the computing environment, including people, information, processes, systems, networks, applications and databases, across hardware and software platforms and programs. It offers a portfolio of software solutions, including mainframe; service assurance; security (identity and access management); service and portfolio management, and virtualization and service automation. It delivers its products on-premises or, for certain products, using Software-as-a-Service (SaaS). In June 2013, the Company announced it has completed the acquisition of privately-held Layer 7 Technologies.
CA Chart

CA data by YCharts

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

  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 - PASS
  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 = 3/5

  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 - PASS

Valuation Summary

Key Data:

Recent Price $28.17
MG Value $53.71
MG Opinion Undervalued
Value Based on 3% Growth $30.13
Value Based on 0% Growth $17.66
Market Implied Growth Rate 2.53%
Net Current Asset Value (NCAV) -$3.86
PEmg 13.56
Current Ratio 1.21
PB Ratio 2.19

Balance Sheet – 6/30/2014

Current Assets $4,298,000,000
Current Liabilities $3,562,000,000
Total Debt $1,254,000,000
Total Assets $11,666,000,000
Intangible Assets $6,900,000,000
Total Liabilities $5,998,000,000
Outstanding Shares 440,240,000

Earnings Per Share

2015 (estimate) $2.32
2014 $1.99
2013 $2.07
2012 $1.90
2011 $1.60
2010 $1.45
2009 $1.29
2008 $0.93
2007 $0.22
2006 $0.26
2005 $0.02

Earnings Per Share – ModernGraham

2015 (estimate) $2.08
2014 $1.91
2013 $1.80
2012 $1.58
2011 $1.32
2010 $1.06

Dividend History

CA Dividend Chart

CA Dividend data by YCharts

Conclusion:

CA Incorporated qualifies for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern is the low current ratio, and the company qualifies for the Enterprising Investor by default.  As a result, value 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 undervalued after growing its EPSmg (normalized earnings) from $1.32 in 2011 to an estimated $2.08 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 2.53% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out the previous ModernGraham valuations of CA Incorporated (CA) for more perspective!

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 CA Incorporated (CA)?  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 CA Incorporated (CA) 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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