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 – May 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 stock analysis showing a specific look at how Newfield Exploration Company (NFX)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Newfield Exploration Company is an independent energy company. The Company is engaged in the exploration, development and production of crude oil, natural gas and natural gas liquids. The Companyâ€™s domestic areas of operations include the Mid-Continent, the Rocky Mountains and onshore Gulf Coast. The Companyâ€™s Rocky Mountain region’s focus is oil. The Company is focused in the Uinta Basin of Utah and the Williston Basin of North Dakota. The Companyâ€™s Mid-Continent focus is on the development of its 225,000 net-acre position in the Anadarko Basin. The Company has approximately 160,000 net acres in the Maverick Basin, located in Maverick, Dimmit and Zavala counties, Texas.
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 FAIL
- 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 PASS
Enterprising Investor – must pass at least 4Â of the following 5 tests or be suitable for a defensive investor: Score = 1/5
- 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 FAIL
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
|Value Based on 3% Growth||$15.75|
|Value Based on 0% Growth||$9.23|
|Market Implied Growth Rate||12.82%|
|Net Current Asset Value (NCAV)||-$26.41|
Balance Sheet – MarchÂ 2015
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Newfield Exploration does not pay a dividend.
As this stock analysis shows, Newfield Exploration CompanyÂ is not suitableÂ for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor is concerned with the low current ratio, the insufficient earningsÂ stabilityÂ over the last ten years, the lack of dividends, and the high PEmg ratio. Â The Enterprising Investor is concerned with the level of debt relative to the net current assets, the lack of dividends, and theÂ lack of earnings growth or stability 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 after seeingÂ itsÂ EPSmg (normalized earnings) dropÂ from $1.38 in 2011 to only an estimated $1.09Â for 2015. Â This level of demonstrated earnings growth does not support the market’s implied estimate of 12.82% annual earnings growth over the next 7-10 years.Â As a result, the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value well belowÂ 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 onÂ Newfield Exploration Company (NFX)? 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 any company mentioned in this articleÂ 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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