Benjamin 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 Most Undervalued Companies for the Defensive Investor – December 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 DTE Energy Holding Company (DTE) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): DTE Energy Co. (DTE) is an energy company. The Company operates in four segments: Electric, Gas, Non-utility Operations, and Corporate and others. The Company’s utility operations consist primarily of DTE Electric and DTE Gas. DTE Electric is engaged in the generation, purchase, distribution and sale of electricity to customers. DTE Gas is engaged in the purchase, storage, transportation, distribution and sale of natural gas to customers, and the sale of storage and transportation capacity. Gas Storage and Pipelines consists of natural gas pipelines, gathering and storage businesses. Power and Industrial Projects consists of projects that deliver energy and utility-type products and services to industrial, commercial and institutional customers. Energy Trading consists of energy marketing and trading operations. Corporate and other includes various holding company activities, holds certain non-utility debt and energy-related investments.
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 – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – 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 – FAIL
- 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 – 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 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$57.41|
|Value Based on 0% Growth||$33.65|
|Market Implied Growth Rate||7.27%|
|Net Current Asset Value (NCAV)||-$87.30|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
DTE Energy Holding Company is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, the insufficient earnings growth over the last ten years, and the high PEmg ratio. The Enterprising Investor is concerned with the level of debt relative to the net current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $3.70 in 2010 to an estimated $3.96 for 2014. This level of growth does not support the market’s implied estimate of 7.27% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.
Be sure to check out previous ModernGraham valuations of DTE Energy Holding Company (DTE) for greater perspective!
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 DTE Energy Holding Company (DTE)? 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 DTE Energy Holding Company (DTE) 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.