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 Harman International Industries (HAR) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Harman International Industries Inc. (Harman), develops, manufactures and markets audio products, lighting solutions and electronic systems, and offers digitally integrated audio and infotainment systems for the automotive industry. The Company’s products are sold under multiple brands, primarily Aha, AKG, AMX, Becker, BSS, Crown, DigiTech, Infinity, JBL, Lexicon, Mark Levinson, Revel, Selenium and yurbuds. The Infotainment segment of the Company designs, manufactures and markets infotainment systems for vehicle applications to be installed primarily as original equipment by automotive manufacturers. The Lifestyle segment designs, manufactures and markets automotive audio systems for vehicle applications. The Professional segment designs, manufactures and markets a range of loudspeakers, power amplifiers, digital signal processors, microphones and headphones.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of HAR – September 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 | $7,014,712,294 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.39 | Fail | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Fail | ||
| 4. Dividend Record | Dividend Payments for 10 years prior | Fail | ||
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | -2060.81% | Fail | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 21.08 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 2.99 | Fail | |
| 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 | 1.39 | Fail | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 1.30 | 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 | $4.64 |
| MG Growth Estimate | 15.00% |
| MG Value | $178.74 |
| Opinion | Undervalued |
| MG Value based on 3% Growth | $67.32 |
| MG Value based on 0% Growth | $39.46 |
| Market Implied Growth Rate | 6.29% |
| Current Price | $97.86 |
| % of Intrinsic Value | 54.75% |
Harman International Industries does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, inconsistent dividend history, and the high PEmg and PB ratios. The Enterprising Investor is concerned with 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 undervalued after growing its EPSmg (normalized earnings) from $1.64 in 2012 to an estimated $4.64 for 2016.  This level of demonstrated earnings growth outpaces 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 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 Harman International Industries (HAR)?  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) | -$8.36 |
| Graham Number | $68.80 |
| PEmg | 21.08 |
| Current Ratio | 1.39 |
| PB Ratio | 2.99 |
| Dividend Yield | 1.35% |
| Number of Consecutive Years of Dividend Growth | 6 |
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| ModernGraham tagged articles | Morningstar |
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| Yahoo Finance | Seeking Alpha |
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Most Recent Balance Sheet Figures
| Total Current Assets | $2,948,770,000 |
| Total Current Liabilities | $2,120,368,000 |
| Long-Term Debt | $1,080,667,000 |
| Total Assets | $5,929,752,000 |
| Intangible Assets | $1,956,847,000 |
| Total Liabilities | $3,555,139,000 |
| Shares Outstanding (Diluted Average) | 72,514,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $6.31 |
| Jun15 | $4.84 |
| Jun14 | $3.36 |
| Jun13 | $2.04 |
| Jun12 | $4.57 |
| Jun11 | $1.90 |
| Jun10 | $2.25 |
| Jun09 | -$7.19 |
| Jun08 | $1.73 |
| Jun07 | $4.72 |
| Jun06 | $3.75 |
| Jun05 | $3.31 |
| Jun04 | $2.27 |
| Jun03 | $1.55 |
| Jun02 | $0.85 |
| Jun01 | $0.48 |
| Jun00 | $1.03 |
| Jun99 | $0.16 |
| Jun98 | $0.67 |
| Jun97 | $0.74 |
| Jun96 | $0.79 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $4.64 |
| Jun15 | $3.65 |
| Jun14 | $2.98 |
| Jun13 | $2.10 |
| Jun12 | $1.64 |
| Jun11 | $0.34 |
| Jun10 | $0.06 |
| Jun09 | -$0.27 |
| Jun08 | $3.18 |
| Jun07 | $3.64 |
| Jun06 | $2.85 |
| Jun05 | $2.16 |
| Jun04 | $1.47 |
| Jun03 | $0.99 |
| Jun02 | $0.68 |
| Jun01 | $0.61 |
| Jun00 | $0.67 |
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.  See my current holdings here.  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 be sure to read our full disclaimer.
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