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 EnterprisingÂ Investor.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 Cerner Corporation (CERN)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Cerner Corporation is a supplier of healthcare information technology solutions, services, devices and hardware. Cerner solutions optimize processes for healthcare organizations. These solutions are licensed by 9,300 facilities globally, including more than 2,650 hospitals; 3,750 physician practices 40,000 physicians; 500 ambulatory facilities, such as laboratories, ambulatory centers, cardiac facilities, radiology clinics and surgery centers; 800 home health facilities; 40 employer sites and 1,600 retail pharmacies. It operates in two segments: domestic, which includes revenue contributions and expenditures associated with business activity in the United States, and global, which includes revenue contributions and expenditures linked to business activity in Argentina, Aruba, Canada, Cayman Islands, Chile, Puerto Rico, Saudi Arabia, Singapore, Spain and the United Arab Emirates. Effective March 18, 2013, it acquired Labotix Automation Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- 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 -Â 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 – 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 -Â 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 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â FAIL
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$17.26|
|Value Based on 0% Growth||$10.12|
|Market Implied Growth Rate||19.68%|
|Net Current Asset Value (NCAV)||$2.63|
Balance Sheet – 6/28/2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Cerner Corporation does not pay a dividend.
Cerner Corporation is not suitable for the Defensive Investor but does qualify for the Enterprising Investor.Â Â The Defensive Investor has concerns withÂ the lack of dividend payments and the high PEmg and PB ratios, while 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 research into the company and comparing it to other opportunities. Â As for a valuation,Â the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.57 in 2010 to an estimated $1.19 for 2014. Â This level of demonstrated growth does not supportÂ the market’s implied estimate of 19.68%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
Be sure to check out theÂ previousÂ ModernGraham valuations of Cerner Corporation (CERN)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 Cerner Corporation (CERN)? 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 aÂ position in Cerner Corporation (CERN)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.