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 Companies Benjamin Graham Would Invest In Today – February 2016. 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 Albemarle Corp (ALB) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Albemarle Corporation (Albemarle) is a developer, manufacturer and marketer of specialty chemicals across a range of end markets, including the petroleum refining, consumer electronics, plastics/packaging, construction, automotive, lubricants, pharmaceuticals, crop protection, food-safety and custom chemistry services markets. The Company operates through two segments: Performance Chemicals and Catalyst Solutions. As of December 31, 2014, the Performance Chemicals segment includes the Fire Safety Solutions, Specialty Chemicals and Fine Chemistry Services product categories. As of December 31, 2014, the Catalyst Solutions segment includes the Refinery Catalyst Solutions and Performance Catalyst Solutions product categories.
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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||$6,316,704,576||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.30||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||48.31%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||18.73||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.95||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||1.30||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||8.93||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||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-1.22%|
|MG Value based on 3% Growth||$42.18|
|MG Value based on 0% Growth||$24.72|
|Market Implied Growth Rate||5.12%|
|% of Intrinsic Value||308.70%|
Albemarle Corporation qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $3.17 in 2011 to an estimated $2.91 for 2015. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.12% 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.
Albemarle Corporation performs fairly well in the ModernGraham grading system, scoring a B.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$42.74|
|Number of Consecutive Years of Dividend Growth||20|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||Sep2015|
|Total Current Assets||$1,720,915,000|
|Total Current Liabilities||$1,322,548,000|
|Shares Outstanding (Diluted Average)||112,544,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.19|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$2.91|
Other ModernGraham posts about the company
|Albemarle Corporation Valuation – November 2015 Update $ALB|
|Albemarle Corporation Analysis – Initial Coverage $ALB|
Other ModernGraham posts about related companies
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.