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 10 Most Undervalued Companies for the Defensive Investor – NovemberÂ 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 American Electric Power Co (AEP)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): American Electric Power Company, Inc. is a utility holding company. It operates in five segments. The vertically integrated utilities segment generates, transmits and distributes electricity through AEP Generating Company, Appalachian Power Company, Indiana Michigan Power Company, Kingsport Power Company, Kentucky Power Company, Public Service Company of Oklahoma, Southwestern Electric Power Company and Wheeling Power Company. The Transmission and Distribution Utilities segment transmits and distributes electricity through Ohio Power Company, AEP Texas Central Company and AEP Texas North Company. The Generation & Marketing segmentâ€™s subsidiaries consist of nonutility generating assets, a wholesale energy trading and marketing business and a retail supply and energy management business. AEP Transmission Holdco is a holding company for AEPâ€™s transmission joint ventures and AEP Transmission Company, LLC. The AEP River Operations segment transports liquid, coal and dry bulk commodities.
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 aÂ 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||$27,370,711,329||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.64||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||16.38%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||16.85||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.57||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||0.64||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-7.01||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||0.49%|
|MG Value based on 3% Growth||$48.58|
|MG Value based on 0% Growth||$28.48|
|Market Implied Growth Rate||4.18%|
|% of Intrinsic Value||177.78%|
American Electric Power CoÂ does not qualify for either theÂ Enterprising Investor orÂ the more conservative Defensive Investor. Â The Defensive Investor is concerned by the low current ratio, and the insufficient earnings growth over the last ten years. Â The Enterprising Investor has concerns with the level of debt in relation to the current assets.Â As a result, all value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.
As for a valuation,Â the company appears to be overvalued afterÂ growingÂ itsÂ EPSmg (normalized earnings) from $3.24 in 2011 to an estimated $3.35 for 2015. Â This level of demonstrated earnings growth does not support the market’s implied estimate of 4.18% 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 American Electric Power Co (AEP)? 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)||-$79.16|
|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
|Balance Sheet Information||Sep15|
|Total Current Assets||$4,548,000,000|
|Total Current Liabilities||$7,058,000,000|
|Shares Outstanding (Diluted Average)||490,800,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.71|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$3.35|
Other ModernGraham posts about the company
|22 Companies in the Spotlight This Week â€“ 11/29/14|
|American Electric Power Company Inc. Annual Valuation â€“ 2014 $AEP|
|ModernGraham Valuation: American Electric Power (AEP)|
Other ModernGraham posts about related companies
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 See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.