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 to Research for the Defensive Investor -Â October 2014.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 Sempra Energy (SRE)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Sempra Energy is a holding company. During the year ended December 31, 2011, Sempra Energyâ€™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
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- 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 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 -Â FAIL
- 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 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 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|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|
Balance Sheet – JuneÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Sempra EnergyÂ does not satisfyÂ either the Defensive Investor or the Enterprising Investor. Â 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. Â The Enterprising Investor has concerns with the level of debt relative to the current assets. Â As a result, value investors followingÂ the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time. Â From a valuation side of things,Â the company appears to be overvaluedÂ after growingÂ its EPSmg (normalized earnings) from $4.00 in 2010 to only an estimated $4.13 for 2014. Â This low level of demonstrated growth does not support the market’s implied estimate of 8.80%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.
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 Sempra Energy (SRE)? 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 a position in Sempra Energy (SRE)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.