Sempra Energy Annual Valuation – October 2014 $SRE

SREBenjamin 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 to Research for the Defensive Investor - October 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 Sempra Energy (SRE) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Sempra Energy is a holding company. During the year ended December 31, 2011, Sempra Energy’s business was organized in five segments consisting of San Diego Gas & Electric Company (SDG&E), Southern California Gas Company (SoCalGas), Sempra Generation, Sempra Pipelines & Storage and Sempra LNG (liquefied natural gas). Sempra Generation, Sempra Pipelines & Storage and Sempra LNG are subsidiaries of Sempra Global. Sempra Global is a holding company for most of its subsidiaries. In September 2013, Sempra Energy’s Sempra United States Gas & Power acquired and will develop the Broken Bow 2 wind project in Nebraska.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  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 - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  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 $107.74
MG Value $39.14
MG Opinion Overvalued
Value Based on 3% Growth $59.87
Value Based on 0% Growth $35.09
Market Implied Growth Rate 8.80%
Net Current Asset Value (NCAV) -$91.64
PEmg 26.10
Current Ratio 1.08
PB Ratio 2.41

Balance Sheet – June 2014

Current Assets $4,195,000,000
Current Liabilities $3,882,000,000
Total Debt $12,323,000,000
Total Assets $38,307,000,000
Intangible Assets $1,421,000,000
Total Liabilities $27,113,000,000
Outstanding Shares 250,100,000

Earnings Per Share

2014 (estimate) $4.29
2013 $4.01
2012 $3.48
2011 $5.51
2010 $2.98
2009 $4.52
2008 $4.43
2007 $4.16
2006 $5.38
2005 $3.65
2004 $0.92

Earnings Per Share – ModernGraham

2014 (estimate) $4.13
2013 $4.07
2012 $4.12
2011 $4.40
2010 $4.00
2009 $4.48

Dividend History


Sempra Energy does not satisfy either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, the lack of earnings growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor has concerns with the 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 side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $4.00 in 2010 to only an estimated $4.13 for 2014.  This low level of demonstrated growth does not support the market’s implied estimate of 8.80% 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 Sempra Energy (SRE)?  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 Sempra Energy (SRE) 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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