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 NextEra Energy Inc. (NEE) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): NextEra Energy, Inc. (NEE) is a holding company. The Company operates through its wholly owned subsidiaries, Florida Power & Light Company (FPL) and NextEra Energy Resources, LLC (NEER). It is an electric power company in North America with electric generating facilities located in 27 states in the United States and four provinces in Canada. Its segments are FPL and NEER. FPL is an electric utility engaged primarily in the generation, transmission, distribution and sale of electric energy in Florida. NEER owns, develops, constructs, manages and operates electric generating facilities in wholesale energy markets primarily in the United States, as well as in Canada and Spain. Corporate and Other segment represents other business activities, primarily NextEra Energy Transmission, LLC (NEET) and FPL FiberNet. NEET operates through Lone Star Transmission, LLC, a transmission service provider in Texas, and New Hampshire Transmission, LLC, a transmission owner in ISO New England.
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|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||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||Fail|
|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||2.79%|
|MG Value based on 3% Growth||$74.79|
|MG Value based on 0% Growth||$43.84|
|Market Implied Growth Rate||6.29%|
|% of Intrinsic Value||149.69%|
NextEra Energy Inc. is not suitable for the more conservative Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, and high PEmg ratio. The Enterprising Investor is concerned by the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $4.35 in 2011 to an estimated $5.16 for 2015. This level of demonstrated earnings growth does not support the market’s implied estimate of 6.29% annual earnings growth 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 below 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 NextEra Energy Inc. (NEE)? 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.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$110.23|
|Number of Consecutive Years of Dividend Growth||20|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$6,346,000,000|
|Total Current Liabilities||$9,421,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$5.57|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$5.16|
Other ModernGraham posts about the company
|47 Companies in the Spotlight This Week – 5/16/15|
|NextEra Energy Inc. Quarterly Valuation – May 2015 $NEE|
|15 Companies in the Spotlight This Week – 5/3/2014|
|NextEra Energy Inc. (NEE) Annual Valuation – 2014|
Other ModernGraham posts about related companies
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. This is not investment advice and all readers should speak with a registered investment adviser prior to making any investment decision. ModernGraham is not affiliated with the company in any manner.