Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Denbury Resources Inc. (DNR) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Denbury Resources Inc. is an independent oil and natural gas company. The Company’s operations are focused in two operating areas: the Gulf Coast and Rocky Mountain regions. The Company’s properties with proved and producing reserves in the Gulf Coast region are situated in Mississippi, Texas, Louisiana and Alabama, and in the Rocky Mountain region are situated in Montana, North Dakota and Wyoming. The Company’s primary Gulf Coast CO2 source is Jackson Dome. The Company’s mature group of properties includes the initial CO2 field, Little Creek, as well as several other fields, including Brookhaven, Cranfield, Eucutta, Lockhart Crossing, Mallalieu, Martinville, McComb and Soso fields. The Company also holds interest in the 183-mile NEJD CO2 pipeline that runs from Jackson Dome to near Donaldsonville, Louisiana.
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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 FAIL
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – 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 = 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 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 PASS
Valuation Summary
Key Data:
| Recent Price | $3.52 |
| MG Value | $15.15 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $15.27 |
| Value Based on 0% Growth | $8.95 |
| Market Implied Growth Rate | -2.58% |
| Net Current Asset Value (NCAV) | -$17.44 |
| PEmg | 3.34 |
| Current Ratio | 2.01 |
| PB Ratio | 0.22 |
Balance Sheet – June 2015
| Current Assets | $769,000,000 |
| Current Liabilities | $382,000,000 |
| Total Debt | $3,596,000,000 |
| Total Assets | $12,468,000,000 |
| Intangible Assets | $1,284,000,000 |
| Total Liabilities | $6,885,000,000 |
| Outstanding Shares | 350,700,000 |
Earnings Per Share
| 2015 (estimate) | $0.22 |
| 2014 | $1.81 |
| 2013 | $1.11 |
| 2012 | $1.35 |
| 2011 | $1.43 |
| 2010 | $0.72 |
| 2009 | -$0.30 |
| 2008 | $1.54 |
| 2007 | $1.00 |
| 2006 | $0.82 |
| 2005 | $0.70 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $1.05 |
| 2014 | $1.41 |
| 2013 | $1.09 |
| 2012 | $1.04 |
| 2011 | $0.88 |
| 2010 | $0.66 |
Dividend History
Free Cash Flow
Conclusion:
Denbury Resources Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the company size, insufficient earnings growth or stability over the last ten years along with the short dividend history.  The Enterprising Investor is concerned with the level of debt relative to the net current assets.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.88 in 2011 to an estimated $1.05 for 2015.  This level of demonstrated earnings growth surpasses the market’s implied estimate of 2.58% annual earnings decline over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Denbury Resources Inc. (DNR)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  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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