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 – June 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 NetApp Inc. (NTAP)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): NetApp, Inc. (NetApp) is a provider of storage and data management software, systems and services. The Companyâ€™s fabric-attached storage (FAS) platform offers the storage platform for business applications, shared infrastructures and cloud environments. NetApp is an original equipment manufacturer (OEM) storage provider and enables OEMs to offer information technology (IT) and storage solutions that serve markets and customer requirements. The Company offers two storage product lines. The FAS architecture utilizes the Data ONTAP storage operating system. Data ONTAP delivers data protection, data management, and built-in software for virtualized, shared infrastructures, cloud computing, and mixed workload business applications. Its E-Series platform with SANtricity storage management software offers storage for SAN workloads. In addition, the Companyâ€™s all-flash storage array architecture, FlashRay provides capabilities to the all-flash market.
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 PASS
- 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 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 FAIL
Enterprising Investor – must pass at least 4Â of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- 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 PASS
- 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
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$24.22|
|Value Based on 0% Growth||$14.20|
|Market Implied Growth Rate||5.86%|
|Net Current Asset Value (NCAV)||$2.51|
Balance Sheet – AprilÂ 2015
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
NetApp Inc.Â qualifies forÂ the Enterprising Investor but not the more conservative Defensive Investor. Â The Defensive Investor is concerned with the short dividend history, and the high PEmg and PB ratios. Â The Enterprising InvestorÂ has no initial concerns. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation. Â As for a valuation,Â the company appears to be fairlyÂ valued afterÂ growingÂ itsÂ EPSmg (normalized earnings) from $1.09 in 2011 to an estimated $1.67 for 2015. Â This level of demonstrated earnings growth supports the market’s implied estimate of 5.86% 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 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 on NetApp Inc. (NTAP)? 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.