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 howÂ General Motors Company (GM)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): General Motors Company (General Motors) designs, builds and sells cars, trucks and automobile parts across the world. The Company also provides automotive financing services through General Motors Financial Company, Inc. (GM Financial). The Company’s four automotive segments include GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO) and GM South America (GMSA). The Company also sells cars and trucks to fleet customers, including daily rental car companies, commercial fleet customers, leasing companies and governments. The Company offers 13 FlexFuel vehicles in the United States for the 2015 model year plus an additional four models to fleet and commercial customers capable of operating on gasoline, E85 ethanol or any combination of the two.
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 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 at least 4Â of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- 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 PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
|Value Based on 3% Growth||$38.72|
|Value Based on 0% Growth||$22.70|
|Market Implied Growth Rate||1.70%|
|Net Current Asset Value (NCAV)||-$39.83|
Balance Sheet – JuneÂ 2015
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
General MotorsÂ does notÂ qualifyÂ for eitherÂ the Defensive Investor and the Enterprising Investor. Â Both investor types are concerned with the short operating history post bankruptcy, 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 overvalued after seeingÂ itsÂ EPSmg (normalized earnings) decline from $17.80 in 2014 to an estimated $2.67 for 2015. Â This level of earnings growth does not supportÂ the market’s implied estimate of 1.7% 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 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 General Motors Company (GM)? 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.