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 Most Undervalued Companies for the Defensive Investor – November 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 NetApp Inc. (NTAP)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â NetApp, Inc. (NetApp) is a provider of storage systems and data management solutions for information technology (IT) infrastructures. Its fabric-attached storage (FAS) platform offers the storage platform for business applications, shared infrastructures and cloud environments. NetApp is an original equipment manufacturer (OEM) storage provider and enables OEMs to offer IT and storage solutions that serve specific markets and customer requirements. It offers two storage platforms: FAS storage platform and E-Series platform. Its FAS storage systems offer integrated protection and data management for virtualized, shared infrastructures and business applications. NetApp offers storage solutions that incorporate its FAS platform and the functionality of its Data ONTAP data and storage resource management software. Its E-Series systems offer OEMs a modular storage platform.
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 -Â PASS
- 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 FAIL
- 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 PASS
- 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 FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â PASS
- 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||$29.68|
|Value Based on 0% Growth||$17.40|
|Market Implied Growth Rate||6.08%|
|Net Current Asset Value (NCAV)||$2.39|
Balance Sheet – OctoberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
NetApp is suitable for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor is concerned by the short dividend history and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. Â From a valuation side of things,Â the company appears to beÂ undervaluedÂ after growingÂ its EPSmg (normalized earnings) from $1.08 in 2011 to an estimated $2.05 for 2015. Â This level of demonstrated growth is greaterÂ thanÂ the market’s implied estimate of 6.08%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ the price.
Be sure to check out previous ModernGraham valuations of NetApp Inc. (NTAP)Â for greater perspective!
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 NetApp Inc. (NTAP)? 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 NetApp Inc. (NTAP)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.