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 Altera Corporation (ALTR)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Altera Corporation is a semiconductor company that designs and sells a range of products, including programmable logic devices (PLDs), highly integrated power devices, pre-defined design building blocks and development software. PLDs consist of field-programmable gate arrays (FPGAs), which are semiconductor integrated circuits, or chips, that the Company’s customers program to perform desired logic and processing functions in their electronic systems. Highly integrated power devices, known as power system-on-chip devices (PowerSoCs), which simplify and drive the miniaturization of power circuitry found in the electronic systems of the Company’s PLD customers. Pre-defined design building blocks, known as intellectual property (IP) cores, which can be licensed by customers to add standard functions to their PLD designs. Development software is used by customers to develop, compile and verify their designs, and then program their designs into the Company’s PLDs.
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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 = 4/5
- 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 FAIL
|Value Based on 3% Growth||$20.74|
|Value Based on 0% Growth||$12.16|
|Market Implied Growth Rate||13.39%|
|Net Current Asset Value (NCAV)||$2.28|
Balance Sheet – MarchÂ 2015
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
AlteraÂ CorporationÂ qualifies for the Enterprising Investor but not the more conservative Defensive Investor. Â The Defensive Investor is concerned with theÂ short dividend historyÂ as well as the high PEmg and PB ratios. Â The Enterprising Investor is only concerned by the lack of earnings growth over the last five years. Â As a result, all 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 overvalued after seeingÂ itsÂ EPSmg (normalized earnings) drop from $1.83 in 2011 to only an estimated $1.43 for 2015. Â This level of demonstrated earnings growth does not support the market’s implied estimate of 13.39% 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 falling 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 Altera Corporation (ALTR)? 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.