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 – MarchÂ 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 Wisconsin Energy Corporation (WEC)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Wisconsin Energy Corporation is a holding company. The Company conducts its operations in two reportable segments: a utility energy segment and a non-utility energy segment. Its primary subsidiaries are Wisconsin Electric Power Company, Wisconsin Gas LLC and W.E. Power, LLC. The Companyâ€™s utility energy segment consists of Wisconsin Electric and Wisconsin Gas, operating together under the trade name of We Energies. We Energies serve approximately 1,128,300 electric customers in Wisconsin and the Upper Peninsula of Michigan and approximately 1,079,800 gas customers in Wisconsin and approximately 445 steam customers in metropolitan Milwaukee, Wisconsin. Its non-utility energy segment consists of We Power, owns and leases to Wisconsin Electric generation plants constructed as part of its Power the Future (PTF) strategy.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- 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 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 -Â PASS
- 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 4 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 – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$35.24|
|Value Based on 0% Growth||$20.66|
|Market Implied Growth Rate||5.84%|
|Net Current Asset Value (NCAV)||-$40.53|
Balance Sheet -Â December 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Wisconsin Energy CorporationÂ is not suitableÂ for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor is concerned by the low current ratio, and the high PEmg and PB ratios, while the Enterprising Investor is concerned with the level of debt relative to the current assets. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should exploreÂ other opportunities at this time. Â From a valuation side of things,Â the company appears to be fairlyÂ valuedÂ after growingÂ its EPSmg (normalized earnings) from $1.66Â in 2010 to $2.43Â for 2014. Â This level of demonstrated growth supportsÂ the market’s implied estimate of 5.84%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative toÂ the price.
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 Wisconsin Energy Corporation (WEC)? 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 a position in Wisconsin Energy Corporation (WEC)Â orÂ 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. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.