Shawcor Ltd Valuation – Initial Coverage $TSE:SCL
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 – December 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 Shawcor Ltd (TSE:SCL) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Shawcor Ltd is a Canada-based energy services company. The Company is engaged in designing, engineering, marketing and selling products and services, such as pipe coating services; flexible composite pipe; onshore and offshore pipeline corrosion and thermal protection; ultrasonic and radiographic inspection services; tubular management services; heat-shrinkable polymer tubing, and control and instrumentation wire and cable. The Company operates through the following segments: Pipeline and Pipe Services, and Petrochemical and Industrial. The Pipeline and Pipe Services segment includes the Bredero Shaw, Canusa-CPS, Shaw Pipeline Services, Flexpipe Systems, Guardian, Desert NDT and Lake Superior Consulting divisions. The Petrochemical and Industrial segment consists of the Connection Systems division. The Company is an applicator of pipeline coatings for the oil and gas industry for both onshore and offshore pipelines.
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*Note – This is a Canadian company. The currency in use is the Canadian Dollar.
Downloadable PDF version of this valuation:
ModernGraham Valuation of TSE-SCL – 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 | $2,226,391,388 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.65 | Fail | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Fail | ||
| 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 | -49.90% | Fail | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 29.25 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 2.64 | 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 | 1.65 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 1.63 | Fail | |
| 3. Earnings Stability | Positive EPS for 5 years prior | Fail | ||
| 4. Dividend Record | Currently Pays Dividend | Pass | ||
| 5. Earnings Growth | EPSmg greater than 5 years ago | Fail | ||
Stage 2: Determination of Intrinsic Value
| EPSmg | $1.18 |
| MG Growth Estimate | -4.25% |
| MG Value | $0.00 |
| Opinion | Overvalued |
| MG Grade | D |
| MG Value based on 3% Growth | $17.05 |
| MG Value based on 0% Growth | $10.00 |
| Market Implied Growth Rate | 10.38% |
| Current Price | $34.40 |
| % of Intrinsic Value | N/A |
Shawcor Ltd 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 stability or growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability or 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 $1.69 in 2012 to an estimated $1.18 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.38% 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 Shawcor Ltd revealed the company was trading above its Graham Number of $0. The company pays a dividend of $0.6 per share, for a yield of 1.7% Its PEmg (price over earnings per share – ModernGraham) was 29.25, 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 $-3.63.
Shawcor Ltd 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) | -$3.63 |
| Graham Number | $0.00 |
| PEmg | 29.25 |
| Current Ratio | 1.65 |
| PB Ratio | 2.64 |
| Current Dividend | $0.60 |
| Dividend Yield | 1.74% |
| Number of Consecutive Years of Dividend Growth | 1 |
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| ModernGraham tagged articles | Morningstar |
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Most Recent Balance Sheet Figures
| Balance Sheet Information | 9/1/2016 |
| Total Current Assets | $556,213,000 |
| Total Current Liabilities | $337,475,000 |
| Long-Term Debt | $355,711,000 |
| Total Assets | $1,633,241,000 |
| Intangible Assets | $540,574,000 |
| Total Liabilities | $790,796,000 |
| Shares Outstanding (Diluted Average) | 64,611,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | -$0.51 |
| Dec2015 | $1.52 |
| Dec2014 | $1.53 |
| Dec2013 | $3.51 |
| Dec2012 | $2.50 |
| Dec2011 | $0.78 |
| Dec2010 | $1.33 |
| Dec2009 | $1.85 |
| Dec2008 | $2.03 |
| Dec2007 | $1.19 |
| Dec2006 | $1.25 |
| Dec2005 | $1.85 |
| Dec2004 | -$1.16 |
| Dec2003 | $0.34 |
| Dec2002 | $0.02 |
| Dec2001 | $0.54 |
| Dec2000 | $0.39 |
| Dec1999 | $0.50 |
| Dec1998 | $1.13 |
| Dec1997 | $0.95 |
| Dec1996 | $0.60 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $1.18 |
| Dec2015 | $2.00 |
| Dec2014 | $2.14 |
| Dec2013 | $2.29 |
| Dec2012 | $1.69 |
| Dec2011 | $1.33 |
| Dec2010 | $1.58 |
| Dec2009 | $1.69 |
| Dec2008 | $1.41 |
| Dec2007 | $0.97 |
| Dec2006 | $0.72 |
| Dec2005 | $0.41 |
| Dec2004 | -$0.19 |
| Dec2003 | $0.31 |
| Dec2002 | $0.37 |
| Dec2001 | $0.60 |
| Dec2000 | $0.66 |
Recommended Reading:
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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.
