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 Dow Components to Research – December 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 Amphenol Corporation (APH)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Amphenol Corporation (Amphenol) is a designer, manufacturer and marketer of electrical, electronic and fiber optic connectors, interconnect systems and coaxial and high-speed specialty cable. Amphenol designs and manufactures connectors and interconnect systems, which are used primarily to conduct electrical and optical signals for a range of electronic applications. It has developed a range of connector and interconnect products for information technology and communications equipment applications, including the converging voice, video and data communications markets. The Company offers a range of interconnect products for factory automation and motion control systems, machine tools, instrumentation and medical systems, mass transportation applications and automotive safety systems and a diverse range of on-board electronics. In addition, Amphenol is a supplier of high performance, military-specification, circular environmental connectors.
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 -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 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 PASS
- Moderate PEmg ratio – PEmg is less than 20 – 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 = 4/5
- 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 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
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$27.51|
|Value Based on 0% Growth||$16.13|
|Market Implied Growth Rate||9.54%|
|Net Current Asset Value (NCAV)||-$1.57|
Balance Sheet – SeptemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Amphenol CorporationÂ qualifiesÂ for the Enterprising Investor but notÂ for the Defensive Investor. Â The Defensive Investor is concerned by the highÂ PEmg and PBÂ ratios. Â The Enterprising Investor, on the other hand, is only concerned by the level of debt relative to the net current assets. Â As a result, Enterprising 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 As for a valuation,Â the company appears to be fairlyÂ valuedÂ after growingÂ its EPSmg (normalized earnings) from $1.13 in 2010 to an estimated $1.90 for 2014. Â This level of demonstrated growth supports the market’s implied estimate of 9.54%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic valueÂ within a margin of safety relative toÂ 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 AmphenolÂ Corporation (APH)? 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 Amphenol Corporation (APH)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.