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 Waters Corporation (WAT) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Waters Corporation (Waters) is an analytical instrument manufacturer. The Company designs, manufactures, distributes and services instrument systems, columns and other chemistry consumables that are integrated and used along with other analytical instruments. The Company has two segments: Waters Division and TA Division. The Waters Division’s products and services primarily consist of high performance liquid chromatography (HPLC), ultra performance liquid chromatography (UPLC and together with HPLC, referred to as LC), mass spectrometry (MS) and chemistry consumable products and related services. TA Division’s products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, life science, biochemical, industrial, nutritional safety, environmental, academic and governmental customers working in research and development, quality assurance and other laboratory applications.
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||$9,802,512,447||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||5.50||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|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||100.63%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||22.50||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||5.14||Fail|
|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||5.50||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||0.56||Pass|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Fail|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||5.29%|
|MG Value based on 3% Growth||$76.80|
|MG Value based on 0% Growth||$45.02|
|Market Implied Growth Rate||7.00%|
|% of Intrinsic Value||117.96%|
Waters Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the lack of dividends and the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned by the lack of dividends. 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 overvalued after growing its EPSmg (normalized earnings) from $4.45 in 2011 to an estimated $5.30 for 2015. This level of demonstrated earnings growth does not support the market’s implied estimate of 7% 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 Waters Corporation (WAT)? 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)||$10.93|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$3,006,957,000|
|Total Current Liabilities||$546,694,000|
|Shares Outstanding (Diluted Average)||83,332,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$5.70|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$5.30|
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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 review our detailed disclaimer.