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 – July 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 Level 3 Communications Inc. (LVLT)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Level 3 Communications, Inc. is a provider of a range of integrated communications services. The Companyâ€™s operating segments include North America includes operations in Georgia, Colorado, Florida, Canada, New York, Arizona, Pennsylvania, Michigan and Oklahoma; Europe includes operations in England, Ireland, The Netherlands and France; The Latin America includes operations in Colombia, Argentina, Venezuela, Peru, Ecuador, Chile and Brazil. The Asia or Pacific includes operations in China, Singapore and Japan. The tw telecom inc. (tw telecom) is an indirect, wholly owned subsidiary of the Company. The Company offers services, which includes core network services and wholesale voice services. It offers products, which include core network services, including transport and fiber services, colocation and data center services, IP and data services, managed services, cloud and IT services, voice services and wholesale voice services, including voice termination and toll free.
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Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7
- 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 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 FAIL
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 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 FAIL
- Dividend Record – currently pays a dividend -Â FAIL
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$1.39|
|Value Based on 0% Growth||$0.82|
|Market Implied Growth Rate||273.67%|
|Net Current Asset Value (NCAV)||-$35.73|
Balance Sheet – MarchÂ 2015
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Level 3 Communications does not pay a dividend.
Level 3 Communications Inc.Â does notÂ qualifyÂ for eitherÂ the Defensive Investor and the Enterprising Investor. Â The Defensive Investor is concerned with the low current ratio, lack of dividends, high PEmg and PB ratios, as well as the insufficient earnings stability or growthÂ over the last ten years. Â The Enterprising Investor is concerned with the level of debt relative to the current assets, the lack of earnings stabilityÂ over the last five years, and the lack of dividends. Â As a result, all valueÂ investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude. Â As for a valuation,Â the company appears to be overvalued after growingÂ itsÂ EPSmg (normalized earnings) fromÂ a loss of $5.61Â in 2011 to an estimated gain of $0.10 for 2015. Â This level of demonstrated earnings growth does not supportÂ the market’s implied estimate of 273.67% 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 Level 3 Communications Inc. (LVLT)? 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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