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 – February 2015.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 Masco Corporation (MAS)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Masco Corporation manufactures, distributes and installs home improvement and building products, with a focus on brand-name consumer products and services. The Company manufacturers home improvement and building products, including faucets, cabinets, architectural coatings and windows, and it also installs insulation for new home construction. The Company provides product offerings in a variety of styles and distributes products through multiple channels, including directly to homebuilders and wholesale and retail channels. The Company has five business segments which include Cabinets and Related Products, Plumbing Products, Installation and Other Services, Decorative Architectural Products and Other Specialty Products. Approximately 81% of its 2013 sales were generated by its North American operations.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- 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 FAIL
- 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 4Â 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 -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 -Â FAIL
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$7.53|
|Value Based on 0% Growth||$4.41|
|Market Implied Growth Rate||21.57%|
|Net Current Asset Value (NCAV)||-$6.82|
Balance Sheet – FebruaryÂ 2015
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
MascoÂ CorporationÂ is not suitableÂ for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years along with the high PEmg and PB ratios. Â The Enterprising Investor is concerned with the level of debt relative to the net current assets and lack of earnings stabilityÂ over the last five years. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should exploreÂ other opportunities. Â As for a valuation,Â the company appears to be overvalued despite growingÂ its EPSmg (normalized earnings) from a loss of $1.15 in 2010 to only $0.52Â for 2014. Â This level of growth does not support the market’s implied estimate of 21.57% growth, leading the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well belowÂ the price.
Be sure to check out previous ModernGraham valuations of Masco Corporation (MAS)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 Masco Corporation (MAS)? 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 aÂ position in Masco Corporation (MAS)Â 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.
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