Williams Companies Annual Valuation – 2015 $WMB

williams_logo_2c_large2Benjamin 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 – January 2015.  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 Williams Companies (WMB) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Williams Companies, Inc. (Williams), is an energy infrastructure company focused on connecting North America’s hydrocarbon resource plays to markets for natural gas, natural gas liquids (NGLs), and olefins. The Company’s operations span from the deepwater Gulf of Mexico to the Canadian oil sands. It operates in three segments: Williams Partners, Midstream Canada & Olefins and Other. Williams’s interstate gas pipeline and domestic midstream interests are held through its investment in Williams Partners L.P. (WPZ). It owns the general-partner interest and a 70% limited-partner interest in WPZ. Williams also owns a Canadian midstream and domestic olefins production business, which processes oil sands off-gas and produces olefins for petrochemical feedstocks. In January 2012, the Company completed the process of separating the Company’s businesses into two stand-alone operations. In March 2014, Williams Partners L.P. acquired Williams’ in-service Alberta, Canada operations.

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 - PASS
  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 = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  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 - FAIL
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $44.83
MG Value $24.95
MG Opinion Overvalued
Value Based on 3% Growth $9.40
Value Based on 0% Growth $5.51
Market Implied Growth Rate 30.34%
Net Current Asset Value (NCAV) -$51.56
PEmg 69.18
Current Ratio 0.65
PB Ratio 3.69

Balance Sheet – September 2014

Current Assets $1,898,000,000
Current Liabilities $2,931,000,000
Total Debt $19,922,000,000
Total Assets $49,807,000,000
Intangible Assets $12,794,000,000
Total Liabilities $40,678,000,000
Outstanding Shares 752,100,000

Earnings Per Share

2014 (estimate) $0.75
2013 $0.62
2012 $1.37
2011 $0.63
2010 -$1.88
2009 $0.49
2008 $2.40
2007 $1.63
2006 $0.51
2005 $0.53
2004 $0.31

Earnings Per Share – ModernGraham

2014 (estimate) $0.65
2013 $0.48
2012 $0.47
2011 $0.24
2010 $0.24
2009 $1.23

Dividend History


Williams Companies (WMB) is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, lack of earnings stability or growth over the last ten years, and the high PEmg and PB ratios.  The Enterprising Investor is concerned with the level of debt relative to the current assets along with the lack of earnings stability over the last five years.  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 $0.24 in 2010 to only an estimated $0.65 for 2014.  This level of growth does not support the market’s implied estimate of 30.34% 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 Williams Companies (WMB) 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 Williams Companies (WMB)?  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 Williams Companies (WMB) 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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