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CMS Energy Corporation Quarterly Valuation – November 2014 $CMS

220px-CMS_Energy_Logo.svgBenjamin 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 – November 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 CMS Energy Corporation (CMS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): CMS Energy Corporation (CMS Energy) is an energy company operating primarily in Michigan. CMS Energy is the parent holding company of several subsidiaries, including Consumers Energy Company (Consumers) and CMS Enterprises Company (CMS Enterprises). Consumers is an electric and gas utility, and CMS Enterprises, primarily a domestic independent power producer. Consumers serves individuals and businesses operating in the alternative energy, automotive, chemical, metal, and food products industries, as well as a diversified group of other industries. CMS Enterprises, through its subsidiaries and equity investments, is engaged primarily in independent power production and owns power generation facilities fueled mostly by natural gas and biomass. CMS Energy operates in three business segments: electric utility, gas utility and enterprises, its non-utility operations and investments.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  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 - FAIL
  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 - 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 - FAIL

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 $32.91
MG Value $61.86
MG Opinion Undervalued
Value Based on 3% Growth $23.30
Value Based on 0% Growth $13.66
Market Implied Growth Rate 5.99%
Net Current Asset Value (NCAV) -$43.60
PEmg 20.48
Current Ratio 1.66
PB Ratio 2.46

Balance Sheet – September 2014

Current Assets $2,734,000,000
Current Liabilities $1,648,000,000
Total Debt $8,171,000,000
Total Assets $18,381,000,000
Intangible Assets $0
Total Liabilities $14,711,000,000
Outstanding Shares 274,700,000

Earnings Per Share

2014 (estimate) $1.77
2013 $1.66
2012 $1.39
2011 $1.58
2010 $1.28
2009 $0.91
2008 $1.20
2007 -$1.02
2006 -$0.41
2005 -$0.44
2004 $0.64

Earnings Per Share – ModernGraham

2014 (estimate) $1.61
2013 $1.47
2012 $1.34
2011 $1.14
2010 $0.75
2009 $0.34

Dividend History

Conclusion:

CMS Energy is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the company’s low current ratio, short dividend history, insufficient earnings growth or stability over the last ten years and high PEmg ratio.  The Enterprising Investor is only concerned by the 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 further research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.75 in 2010 to an estimated $1.61 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 5.99% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above 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 CMS Energy Corporation (CMS)?  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 CMS Energy Corporation (CMS) 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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