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 Summit Hotel Properties Inc (INN) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Summit Hotel Properties, Inc. is a holding company and conducts all of its operations through its Summit Hotel OP, LP (operating partnership). The Company is a real estate investments trust (REIT) and self-managed hotel investment company. The Company operates in the segment of activities related to investing in real estate. The Company is focused on owning premium-branded, select-service hotels in the Upscale and Upper-midscale segments of the United States lodging industry. The Company’s portfolio consists of approximately 90 hotels with over 11,420 guestrooms located in approximately 20 states. Approximately 86.1% of its guestrooms are located in over 50 metropolitan statistical areas (MSAs); approximately 94.5% are located within over 100 MSAs, and approximately 97.3% of its hotel guestrooms operate under franchise brands owned by Marriott International, Inc., Hilton Worldwide, Intercontinental Hotel Group and an affiliate of Hyatt Hotels Corporation.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of INN – 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 | $1,303,295,681 | Fail | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 2.54 | Pass | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Fail | ||
| 4. Dividend Record | Dividend Payments for 10 years prior | Fail | ||
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | -2622.22% | Fail | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 23.28 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 1.33 | 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 | 2.54 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 6.73 | 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 | Pass | ||
Stage 2: Determination of Intrinsic Value
| EPSmg | $0.64 |
| MG Growth Estimate | 15.00% |
| MG Value | $24.64 |
| Opinion | Undervalued |
| MG Grade | B- |
| MG Value based on 3% Growth | $9.28 |
| MG Value based on 0% Growth | $5.44 |
| Market Implied Growth Rate | 7.39% |
| Current Price | $14.90 |
| % of Intrinsic Value | 60.47% |
Summit Hotel Properties Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability or growth over the last ten years, the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability 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 Undervalued after growing its EPSmg (normalized earnings) from $-0.12 in 2012 to an estimated $0.64 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 7.39% 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 above the price.
At the time of valuation, further research into Summit Hotel Properties Inc revealed the company was trading below its Graham Number of $15.71. The company pays a dividend of $0.5 per share, for a yield of 3.4%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 23.28, which was below the industry average of 31.91, 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 $-6.07.
Summit Hotel Properties Inc performs fairly well in the ModernGraham grading system, scoring a B-.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$6.07 |
| Graham Number | $15.71 |
| PEmg | 23.28 |
| Current Ratio | 2.54 |
| PB Ratio | 1.33 |
| Current Dividend | $0.50 |
| Dividend Yield | 3.37% |
| Number of Consecutive Years of Dividend Growth | 3 |
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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 | $151,916,000 |
| Total Current Liabilities | $59,904,000 |
| Long-Term Debt | $618,892,000 |
| Total Assets | $1,660,228,000 |
| Intangible Assets | $0 |
| Total Liabilities | $682,792,000 |
| Shares Outstanding (Diluted Average) | 87,401,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $0.98 |
| Dec2015 | $1.24 |
| Dec2014 | $0.05 |
| Dec2013 | -$0.12 |
| Dec2012 | -$0.17 |
| Dec2011 | -$0.12 |
| Dec2010 | -$0.11 |
| Dec2009 | -$0.09 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $0.64 |
| Dec2015 | $0.37 |
| Dec2014 | -$0.07 |
| Dec2013 | -$0.13 |
| Dec2012 | -$0.12 |
| Dec2011 | -$0.09 |
| Dec2010 | -$0.06 |
| Dec2009 | -$0.03 |
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.
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