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 10 Most Undervalued Companies for the Defensive Investor – August 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 CA Inc. (CA) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): CA, Inc. (CA Technologies) is engaged in providing information technology (IT) management software and solutions. The Company operates through three business segments: Mainframe Solutions, Enterprise Solutions and Services. The Mainframe Solutions segment products allow customers and partners transform mainframe management. The Enterprise Solutions segment consists of products, including DevOps, which allows customers to unite application development and IT operations; Management Cloud, which includes the Company’s IT Business Management (ITBM) solutions, API Management solutions and Enterprise Mobility Management solutions, and Security, which consists of identity and access management. The Services segment consists of product implementation, consulting, customer education and customer training. In addition, it offers a solution for controlling and protecting IT administrator or other privileged user accounts from external attacks or insider mistakes and malicious misuse.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of CA – August 2015
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| 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 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | Pass | |
| Score | |||
| 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
| EPSmg | $2.11 |
| MG Growth Estimate | 4.76% |
| MG Value | $38.00 |
| Opinion | Undervalued |
| MG Value based on 3% Growth | $30.58 |
| MG Value based on 0% Growth | $17.92 |
| Market Implied Growth Rate | 2.18% |
| Current Price | $27.12 |
| % of Intrinsic Value | 71.37% |
CA Inc. qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor’s only concern is the low current ratio while the Enterprising Investor is willing to overlook concerns regarding the level of debt relative to the current assets because the company passes the more rigorous Defensive Investor requirements. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.60 in 2012 to an estimated $2.11 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.18% 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 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 CA Inc. (CA)?  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) | -$2.81 |
| Graham Number | $26.47 |
| PEmg | 12.86 |
| Current Ratio | 1.39 |
| PB Ratio | 2.07 |
| Dividend Yield | 3.69% |
| Number of Consecutive Years of Dividend Growth | 0 |
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| ModernGraham tagged articles | Morningstar |
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| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Total Current Assets | $3,745,000,000 |
| Total Current Liabilities | $2,686,000,000 |
| Long-Term Debt | $1,250,000,000 |
| Total Assets | $10,707,000,000 |
| Intangible Assets | $6,517,000,000 |
| Total Liabilities | $4,974,000,000 |
| Shares Outstanding (Diluted Average) | 438,000,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $2.38 |
| Mar15 | $1.90 |
| Mar14 | $2.02 |
| Mar13 | $2.07 |
| Mar12 | $1.93 |
| Mar11 | $1.61 |
| Mar10 | $1.47 |
| Mar09 | $1.29 |
| Mar08 | $0.93 |
| Mar07 | $0.22 |
| Mar06 | $0.27 |
| Mar05 | $0.05 |
| Mar04 | -$0.15 |
| Mar03 | -$0.65 |
| Mar02 | -$2.11 |
| Mar01 | -$0.46 |
| Mar00 | $1.23 |
| Mar99 | $1.11 |
| Mar98 | $2.06 |
| Mar97 | $0.65 |
| Mar96 | -$0.10 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $2.11 |
| Mar15 | $1.95 |
| Mar14 | $1.92 |
| Mar13 | $1.81 |
| Mar12 | $1.60 |
| Mar11 | $1.33 |
| Mar10 | $1.07 |
| Mar09 | $0.76 |
| Mar08 | $0.42 |
| Mar07 | $0.09 |
| Mar06 | -$0.15 |
| Mar05 | -$0.47 |
| Mar04 | -$0.62 |
| Mar03 | -$0.63 |
| Mar02 | -$0.29 |
| Mar01 | $0.71 |
| Mar00 | $1.20 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
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.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please also take a moment to read our full disclaimer.
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