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 Defensive Investor Near 52 Week Lows – September 2014. 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 Northeast Utilities (NU) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Northeast Utilities (NU) is a public utility holding company. The Company is primarily engaged in the energy delivery business through its wholly owned utility subsidiaries, which include The Connecticut Light and Power Company (CL&P); NSTAR Electric Company (NSTAR Electric); Public Service Company of New Hampshire (PSNH); Western Massachusetts Electric Company (WMECO; NSTAR Gas Company (NSTAR Gas), and Yankee Gas Services Company (Yankee Gas).The Company’s segments include the electric distribution segment, the natural gas distribution segment and the electric transmission segment. The electric distribution segment includes the generation businesses of PSNH and WMECO. On April 10, 2012, NU completed its merger with NSTAR (Merger).
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- 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 – PASS
- 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 – PASS
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$33.75|
|Value Based on 0% Growth||$19.78|
|Market Implied Growth Rate||5.56%|
|Net Current Asset Value (NCAV)||-$50.50|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Northeast Utilities does not qualify for either the Defensive Investor or the Enterprising Investor. The Defensive Investor has concerns with the low current ratio and the lack of earnings stability over the last ten years. The Enterprising Investor is concerned by the high level of debt relative to the current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time. From a valuation perspective, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.84 in 2010 to an estimated $2.33 for 2014. This level of earnings growth does not support the market’s implied estimate of 5.56% 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 Northeast Utilities (NU)? 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 Northeast Utilities (NU) 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.