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 – 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 Helmerich & Payne Inc. (HP) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Helmerich & Payne, Inc. is engaged in contract drilling of oil and gas wells for others. The Company is also engaged in the ownership, development and operation of commercial real estate and the research and development of rotary steerable technology. The Company operates in three segments: U.S Land operates its drilling operations in Oklahoma, California, Texas, Wyoming, Colorado, Louisiana, Pennsylvania, Ohio, Utah, Arkansas, New Mexico, Montana, North Dakota, West Virginia and Nevada; Offshore operates its drilling operations in the Gulf of Mexico, and offshore of California and Equatorial Guinea, and International Land operates its drilling operations in six international locations, which include Ecuador, Colombia, Argentina, Tunisia, Bahrain and United Arab Emirates (UAE).
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- 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 – FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- 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 = 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
Valuation Summary
Key Data:
| Recent Price | $68.17 |
| MG Value | $98.95 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $67.16 |
| Value Based on 0% Growth | $39.37 |
| Market Implied Growth Rate | 3.11% |
| Net Current Asset Value (NCAV) | -$6.16 |
| PEmg | 14.72 |
| Current Ratio | 2.71 |
| PB Ratio | 1.51 |
Balance Sheet – December 2014
| Current Assets | $1,210,000,000 |
| Current Liabilities | $447,000,000 |
| Total Debt | $40,000,000 |
| Total Assets | $6,802,000,000 |
| Intangible Assets | $0 |
| Total Liabilities | $1,880,000,000 |
| Outstanding Shares | 108,800,000 |
Earnings Per Share
| 2015 (estimate) | $1.72 |
| 2014 | $6.46 |
| 2013 | $6.79 |
| 2012 | $5.34 |
| 2011 | $3.99 |
| 2010 | $1.45 |
| 2009 | $3.31 |
| 2008 | $4.34 |
| 2007 | $4.27 |
| 2006 | $2.77 |
| 2005 | $1.23 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $4.63 |
| 2014 | $5.66 |
| 2013 | $4.90 |
| 2012 | $3.86 |
| 2011 | $3.24 |
| 2010 | $2.99 |
Dividend History
Conclusion:
Helmerich & Payne Inc. is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned by the low level of earnings growth over the last ten years, while the Enterprising Investor has no initial concerns.  As a result, all value investors 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.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.24 in 2011 to an estimated $4.63 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 3.11% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.
Be sure to check out previous ModernGraham valuations of Helmerich & Payne Inc. (HP)Â 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 Helmerich & Payne Inc. (HP)?  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 Helmerich & Payne Inc. (HP) 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.
Leave a Reply