Rockwell Collins Inc Valuation – January 2016 Update $COL

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 – November 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 Rockwell Collins Inc (COL) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Rockwell Collins, Inc. is engaged in design, production and support of communications and aviation electronics for commercial and military customers around the world. The Company’s products and systems are focused on aviation applications. It operates in two segments: Government Systems and Commercial Systems. The Company’s Government Systems business provides a range of electronic products, systems and services to customers. The Company’s Commercial Systems business supplies aviation electronics systems, products and services to customers located throughout the world. Its integrated system solutions and products cater to a range of markets. It also provides a range of services and support, including equipment repair and overhaul, service parts and field service engineering. It enables wireless distribution of digital information aboard the aircraft. Its portfolio of cabin products and services, allows airlines to stream video content to approximately 250 passengers simultaneously.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of COL – January 2016

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 $11,729,569,278 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.51 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 29.45% Fail
6. Moderate PEmg Ratio PEmg < 20 18.06 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 6.22 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 1.51 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.54 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

COL value Chart January 2016

EPSmg $4.85
MG Growth Estimate 3.44%
MG Value $74.58
Opinion Overvalued
MG Value based on 3% Growth $70.32
MG Value based on 0% Growth $41.22
Market Implied Growth Rate 4.78%
Current Price $87.60
% of Intrinsic Value 117.45%

Rockwell Collins Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years along with the high PB ratio.  The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets.  As a result, all Enterprising 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 $3.94 in 2012 to an estimated $4.85 for 2016.  This level of demonstrated earnings growth does not support the market’s implied estimate of 4.78% 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 Rockwell Collins Inc (COL)?  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

COL Charts January 2016

Net Current Asset Value (NCAV) -$17.12
Graham Number $40.51
PEmg 18.06
Current Ratio 1.51
PB Ratio 6.22
Dividend Yield 1.44%
Number of Consecutive Years of Dividend Growth 2



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Most Recent Balance Sheet Figures

Balance Sheet Information Sep15
Total Current Assets $3,233,000,000
Total Current Liabilities $2,144,000,000
Long-Term Debt $1,680,000,000
Total Assets $7,389,000,000
Intangible Assets $2,607,000,000
Total Liabilities $5,514,000,000
Shares Outstanding (Diluted Average) 133,200,000

Earnings Per Share History

Next Fiscal Year Estimate $5.13
Sep15 $5.13
Sep14 $4.42
Sep13 $4.58
Sep12 $4.15
Sep11 $4.06
Sep10 $3.52
Sep09 $3.73
Sep08 $4.16
Sep07 $3.45
Sep06 $2.73
Sep05 $2.20
Sep04 $1.67
Sep03 $1.43
Sep02 $1.28
Sep01 $0.76

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $4.85
Sep15 $4.63
Sep14 $4.30
Sep13 $4.16
Sep12 $3.94
Sep11 $3.82
Sep10 $3.64
Sep09 $3.55
Sep08 $3.26
Sep07 $2.64
Sep06 $2.11
Sep05 $1.69
Sep04 $1.29
Sep03 $0.97
Sep02 $0.63
Sep01 $0.25

Recommended Reading:

Other ModernGraham posts about the company

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Rockwell Collins Inc. Annual Valuation – 2014 $COL

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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.

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