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 Integrys Energy Corporation (TEG)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â 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
- 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 PASS
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 FAIL
- 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 PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|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|
Balance Sheet -Â December 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Integrys Energy Corporation (TEG)Â 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 growth or stability over the last ten years along with the high PEmg ratio. Â The Enterprising Investor is concerned with the level of debt relative to the current assets. 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 undervalued afterÂ growingÂ its EPSmg (normalized earnings) from $1.74 in 2010 to $3.60 for 2014. Â This level of growth is greater thanÂ the market’s implied estimate of 5.77% growth, leading the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well aboveÂ the price.
Be sure to check out previous ModernGraham valuations of Integrys Energy Corporation (TEG)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 Integrys Energy Corporation (TEG)? 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 Integrys Energy Corporation (TEG)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.