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 Companies Benjamin Graham Would Invest In Today – February 2016.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 Discover Financial Services (DFS)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Discover Financial Services (DFS) is a direct banking and payment services company. The Company is a bank holding company, as well as a financial holding company. The Company provides direct banking products and services and payment services through its subsidiaries. The Company manages its business activities in two segments: Direct Banking and Payment Services. Direct Banking segment includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services, including private student loans, personal loans, home loans, home equity loans, prepaid cards and other consumer lending and deposit products. The Payment Services segment includes PULSE, Diners Club and the Companyâ€™s network partners business, which provides payment transaction processing and settlement services on the Discover Network.
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 all 6 of the following tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$19,258,814,230||Pass|
|2. Earnings Stability||Positive EPS for 10 years prior||Pass|
|3. Dividend Record||Dividend Payments for 10 years prior||Pass|
|4. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||172.68%||Pass|
|5. Moderate PEmg Ratio||PEmg < 20||9.01||Pass|
|6. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.72||Pass|
|Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.|
|1. Earnings Stability||Positive EPS for 5 years prior||Pass|
|2. Dividend Record||Currently Pays Dividend||Pass|
|3. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||8.05%|
|MG Value based on 3% Growth||$72.61|
|MG Value based on 0% Growth||$42.57|
|Market Implied Growth Rate||0.25%|
|% of Intrinsic Value||36.61%|
Discover Financial ServicesÂ qualifies for bothÂ theÂ Enterprising Investor andÂ the more conservative Defensive Investor. Â In fact, the company passes all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position.Â As a result, all value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods shouldÂ feel comfortable proceeding with further research.
As for a valuation,Â the company appears to be undervalued after growingÂ itsÂ EPSmg (normalized earnings) from $3.26 in 2012 to an estimated $5.01Â for 2016. Â This level of demonstrated earnings growth outpacesÂ the market’s implied estimate of 0.25% 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 aboveÂ the price.
Stage 3: Information for Further Research
|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||Dec2015|
|Shares Outstanding (Diluted Average)||429,520,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$5.32|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$5.01|
Other ModernGraham posts about the company
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.