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 Stocks for Using A Benjamin Graham Value Investing Strategy – August 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 Imperial Oil Limited (IMO) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Imperial Oil Ltd is a Canada-based integrated oil company. The Company is engaged in the exploration for, and production and sale of, crude oil and natural gas. The Company’s operations are conducted in three segments: Upstream, Downstream and Chemical. Upstream operations include the exploration for, and production of, crude oil, natural gas, synthetic oil and bitumen. Downstream operations consist of the transportation and refining of crude oil, blending of refined products and the distribution and marketing of those products. Chemical operations consist of the manufacturing and marketing of various petrochemicals. The Company holds an interest in the Kearl oil sands project, a joint venture with ExxonMobil Canada Properties. The Kearl project recovers shallow deposits of oil sands using open-pit mining methods. The Company transports its crude oil production and third-party crude oil required to supply refineries by contracted pipelines, common carrier pipelines and rail.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of IMO – December 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 | $30,251,399,795 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 0.95 | 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 | -33.68% | Fail | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 17.01 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 1.63 | 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 | 0.95 | Fail | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | -35.23 | 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
| EPSmg | $2.05 |
| MG Growth Estimate | -4.25% |
| MG Value | $0.00 |
| Opinion | Overvalued |
| MG Grade | D |
| MG Value based on 3% Growth | $29.79 |
| MG Value based on 0% Growth | $17.46 |
| Market Implied Growth Rate | 4.26% |
| Current Price | $34.95 |
| % of Intrinsic Value | N/A |
Imperial Oil Limited (USA) does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years. 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 explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $3.5 in 2012 to an estimated $2.05 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 4.26% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Imperial Oil Limited (USA) revealed the company was trading above its Graham Number of $21.32. The company pays a dividend of $0.23 per share, for a yield of 0.7% Its PEmg (price over earnings per share – ModernGraham) was 17.01, which was below the industry average of 55.24, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-13.16.
Imperial Oil Limited (USA) scores quite poorly in the ModernGraham grading system, with an overall grade of D.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$13.16 |
| Graham Number | $21.32 |
| PEmg | 17.01 |
| Current Ratio | 0.95 |
| PB Ratio | 1.63 |
| Current Dividend | $0.23 |
| Dividend Yield | 0.66% |
| Number of Consecutive Years of Dividend Growth | 0 |
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Useful Links:
| ModernGraham tagged articles | Morningstar |
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| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 9/1/2016 |
| Total Current Assets | $2,622,826,000 |
| Total Current Liabilities | $2,762,435,000 |
| Long-Term Debt | $4,918,370,000 |
| Total Assets | $32,113,213,000 |
| Intangible Assets | $141,898,000 |
| Total Liabilities | $13,817,516,000 |
| Shares Outstanding (Diluted Average) | 850,800,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $0.94 |
| Dec2015 | $0.96 |
| Dec2014 | $3.86 |
| Dec2013 | $3.12 |
| Dec2012 | $4.47 |
| Dec2011 | $3.86 |
| Dec2010 | $2.57 |
| Dec2009 | $1.75 |
| Dec2008 | $3.53 |
| Dec2007 | $3.40 |
| Dec2006 | $2.70 |
| Dec2005 | $2.18 |
| Dec2004 | $1.57 |
| Dec2003 | $1.17 |
| Dec2002 | $0.68 |
| Dec2001 | $0.66 |
| Dec2000 | $0.74 |
| Dec1999 | -$0.18 |
| Dec1998 | $0.27 |
| Dec1997 | $0.43 |
| Dec1996 | $0.37 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $2.05 |
| Dec2015 | $2.83 |
| Dec2014 | $3.70 |
| Dec2013 | $3.46 |
| Dec2012 | $3.50 |
| Dec2011 | $3.02 |
| Dec2010 | $2.66 |
| Dec2009 | $2.71 |
| Dec2008 | $3.02 |
| Dec2007 | $2.58 |
| Dec2006 | $1.99 |
| Dec2005 | $1.51 |
| Dec2004 | $1.11 |
| Dec2003 | $0.79 |
| Dec2002 | $0.54 |
| Dec2001 | $0.44 |
| Dec2000 | $0.33 |
Recommended Reading:
Other ModernGraham posts about the company
None. Â This is the first time ModernGraham has covered the company.
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Disclaimer:
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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