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 Pall Corporation (PLL)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Pall Corporation is a filtration, separation and purification company. The Company is a supplier of filtration, separation and purification technologies, principally made by the Company using its engineering capability and fluid management, filter media, and other fluid clarification and separations equipment for the removal of solid, liquid and gaseous contaminants from a variety of liquids and gases. The Company serves customers through two businesses globally: Life Sciences and Industrial. The Life Sciences business group is focused on developing, manufacturing and selling products to customers in the Medical, BioPharmaceuticals and Food & Beverage markets. The Industrial business group is focused on developing, manufacturing and selling products to customers in the Process Technologies, Aerospace and Microelectronics markets.
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Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||Fail|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||Pass|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||11.47%|
|MG Value based on 3% Growth||$52.76|
|MG Value based on 0% Growth||$30.93|
|Market Implied Growth Rate||13.15%|
|% of Intrinsic Value||110.69%|
PallÂ CorporationÂ qualifies for the Enterprising Investor but not the more conservative Defensive Investor. Â The Defensive Investor is concerned with the low current ratio,Â and the high PEmg and PB ratios. Â The Enterprising Investor has no initial concerns. Â As a result, all Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.
As for a valuation,Â the company appears to be overvalued after growingÂ itsÂ EPSmg (normalized earnings) from $2.06 in 2011 to only an estimated $3.64 for 2015. Â This level of demonstrated earnings growthÂ does not supportÂ the market’s implied estimate of 13.15% 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 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 PallÂ Corporation (PLL)? 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.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||$0.71|
|Number of Consecutive Years of Dividend Growth||6|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$2,182,730,000|
|Total Current Liabilities||$1,292,549,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.68|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$3.64|
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.