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 Stocks for Using A Benjamin Graham Value Investing Strategy – DecemberÂ 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 Inter Pipeline Ltd (IPL)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Inter Pipeline Ltd. (Inter Pipeline) owns and operates energy infrastructure assets located in western Canada and Europe. Inter Pipeline operates in four segments: oil sands transportation business, conventional oil pipelines business, natural gas liquids (NGL) extraction business and the bulk liquid storage business. Its oil sands transportation business consists of the Corridor, Cold Lake and Polaris pipeline systems, which transport petroleum products and provide related blending and handling services in Alberta. Its conventional oil pipelines business involves the transportation, storage and processing of hydrocarbons, as well as midstream marketing blending and handling services. Its NGL extraction business consists of processing natural gas to extract NGLs, including ethane and a mixture of propane, butane and pentanes plus. Its bulk liquid storage business involves the storage and handling of bulk liquid products through the operation of over 10 bulk liquid storage terminals.
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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-IPL – 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||$10,798,472,380||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.19||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||161.15%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||28.55||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||3.07||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||0.19||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-2.29||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
|MG Growth Estimate||0.89%|
|MG Value based on 3% Growth||$15.05|
|MG Value based on 0% Growth||$8.82|
|Market Implied Growth Rate||10.03%|
|% of Intrinsic Value||277.89%|
Inter Pipeline 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 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 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 Overvalued after growing its EPSmg (normalized earnings) from $0.98 in 2012 to an estimated $1.04 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.03% 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 Inter Pipeline Ltd revealed the company was trading above its Graham Number of $16.5. The company pays a dividend of $1.55 per share, for a yield of 5.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 28.55, which was below the industry average of 69.19, 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 $-19.1.
Inter Pipeline 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)||-$19.10|
|Number of Consecutive Years of Dividend Growth||7|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||9/1/2016|
|Total Current Assets||$401,400,000|
|Total Current Liabilities||$2,069,600,000|
|Shares Outstanding (Diluted Average)||338,700,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$1.33|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$1.04|
Other ModernGraham posts about the company
None. Â This is the first time ModernGraham has covered 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.
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