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 Navient Corporation (NAVI)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Navient Corporation is a loan management, servicing and asset recovery company. The Company holds the portfolio of education loans insured or guaranteed under the Federal Family Education Loan Program (FFELP), as well as the portfolio of Private Education Loans. FFELP Loans are insured or guaranteed by state based on guaranty agreements among the United States Department of Education (ED) and these agencies. Private Education Loans are education loans to students or their families that bear the full credit risk of the customer and any cosigner. The Company operates in three segments: FFELP Loans, Private Education Loans and Business Services. The Company services its own portfolio of education loans, as well as those owned by banks, credit unions, non-profit education lenders and ED. It also provides asset recovery services on its own portfolio, guaranty agencies, higher education institutions, ED and other federal clients, as well as states, courts and municipalities.
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Defensive Investor – must pass all 6 of the following tests: Score = 3/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- 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 PASS
- 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 all 3Â of the following tests or be suitable for a defensive investor: Score =Â 1/3
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
|Value Based on 3% Growth||$32.06|
|Value Based on 0% Growth||$18.80|
|Market Implied Growth Rate||-0.66%|
Balance Sheet – MarchÂ 2015
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Navient CorporationÂ does notÂ qualifyÂ for eitherÂ the Defensive Investor and the Enterprising Investor. Â Both investor types are concerned with the short operating history as a stand-alone company, as there is not enough data yet to accurately provide information for a full valuation. 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 based on the limited data available,Â the company appears to be undervalued after growingÂ itsÂ EPSmg (normalized earnings) from $0.63 in 2012 to an estimated $2.21 for 2015. Â This level of earnings growth outpacesÂ the market’s implied estimate of 0.66% annual earnings decreaseÂ over the next 7-10 years, andÂ leadsÂ the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ 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 Navient Corporation (NAVI)? 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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