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Integrys Energy Corporation Annual Valuation – 2015 $TEG

Integrys_logoBenjamin 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 – February 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 Integrys Energy Corporation (TEG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Integrys Energy Group Inc. is an energy holding company. The Company along with its wholly owned subsidiaries provides products and services in both the regulated and non-regulated energy markets. The Company operates in five segments: Natural gas utility, Electric utility, Integrys Energy Services, Electric Transmission Investment and Holding Company and Other Segment. Natural gas utilities and Electric utility operations provide service to residential, commercial and industrial, transportation, storage services and other customers. Integrys Energy Services is a non-regulated retail energy supply and services company that sells electricity and natural gas in deregulated markets. The electric transmission investment segment consists of approximately 34% ownership interest in American Transmission Company LLC (ATC). The holding company and other segment include the operations of the Integrys Energy Group holding company and the Peoples Energy, LLC (PELLC) holding company.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  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 - PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  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 - PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $72.07
MG Value $138.42
MG Opinion Undervalued
Value Based on 3% Growth $52.13
Value Based on 0% Growth $30.56
Market Implied Growth Rate 5.77%
Net Current Asset Value (NCAV) -$81.12
PEmg 20.05
Current Ratio 0.98
PB Ratio 1.77

Balance Sheet - December 2014

Current Assets $1,411,000,000
Current Liabilities $1,436,000,000
Total Debt $2,956,000,000
Total Assets $11,282,000,000
Intangible Assets $655,000,000
Total Liabilities $7,982,000,000
Outstanding Shares 81,000,000

Earnings Per Share

2014 $3.43
2013 $4.39
2012 $3.55
2011 $2.87
2010 $2.83
2009 -$0.91
2008 $1.64
2007 $3.50
2006 $3.67
2005 $4.07
2004 $4.07

Earnings Per Share – ModernGraham

2014 $3.60
2013 $3.30
2012 $2.50
2011 $1.98
2010 $1.74
2009 $1.59

Dividend History

Conclusion:

Integrys Energy Corporation (TEG) is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last ten years along with the high PEmg ratio.  The Enterprising Investor is concerned with the level of debt relative to the 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 undervalued after growing its EPSmg (normalized earnings) from $1.74 in 2010 to $3.60 for 2014.  This level of growth is greater than the market’s implied estimate of 5.77% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.

Be sure to check out previous ModernGraham valuations of Integrys Energy Corporation (TEG) 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 Integrys Energy Corporation (TEG)?  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 Integrys Energy Corporation (TEG) 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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