Lorillard Inc. Quarterly Valuation – August 2014 $LO

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 Lorillard Inc. (LO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Lorillard, Inc. (Lorillard) is the manufacturer of cigarettes in the United States. Its Newport is a menthol flavored premium cigarette brand. During the year ended December 31, 2011, the Newport brand accounted for approximately 88.4% of its sales revenue. In addition to the Newport brand, its product line has four additional brand families marketed under the Kent, True, Maverick and Old Gold brand names. These five brands include 43 different product offerings. During 2011, it shipped 40.7 billion cigarettes, all of which were sold in the United States and certain the United States possessions and territories. Lorillard produces cigarettes for both the premium and discount segments of the domestic cigarette market. It sells its products primarily to wholesale distributors, who in turn service retail outlets, chain store organizations, and government agencies, including the United States Armed Forces. In April 2012, it acquired all of the assets of blu ecigs.

LO data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

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 - FAIL
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 = 4/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
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	$59.70
MG Value	$74.39
MG Opinion	Fairly Valued
Value Based on 3% Growth	$43.50
Value Based on 0% Growth	$25.50
Market Implied Growth Rate	5.70%
Net Current Asset Value (NCAV)	-$8.52
PEmg	19.90
Current Ratio	1.78
PB Ratio	-9.65

Balance Sheet – 6/30/2014

Current Assets	$2,053,000,000
Current Liabilities	$1,153,000,000
Total Debt	$3,566,000,000
Total Assets	$2,893,000,000
Intangible Assets	$179,000,000
Total Liabilities	$5,121,000,000
Outstanding Shares	360,000,000

Earnings Per Share

2014 (estimate)	$3.26
2013	$3.16
2012	$2.82
2011	$2.67
2010	$2.26
2009	$1.92
2008	$1.72
2007	$1.72
2006	$1.58
2005	$1.35
2004	$1.23

Earnings Per Share – ModernGraham

2014 (estimate)	$3.00
2013	$2.77
2012	$2.47
2011	$2.22
2010	$1.94
2009	$1.74

Dividend History

LO Dividend data by YCharts

Conclusion:

Lorillard does not qualify for the Defensive Investor but does satisfy for the Enterprising Investor.  The Defensive Investor has concerns with the low current ratio and lack of dividend payments, while the Enterprising Investor’s only concern is 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 research into the company and comparing it to other opportunities.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from a loss of $1.94 in 2010 to an estimated $3.00 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 5.70% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to 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 Lorillard Inc. (LO)?  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 Lorillard Inc. (LO) 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.