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Public Service Enterprise Group Inc Valuation – July 2017 $PEG

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 – March 2017.  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 Public Service Enterprise Group Inc (PEG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Public Service Enterprise Group Incorporated (PSEG) is a holding company. The Company is an energy company with operations located primarily in the Northeastern and Mid-Atlantic United States. The Company’s segments include Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and Other. PSEG is engaged in the transmission of electricity and distribution of electricity and natural gas in certain areas of New Jersey. PSE&G is also the provider of last resort for gas and electric commodity service for end users in its service territory. Power is a multi-regional energy supply company that integrates the operations of its merchant nuclear and fossil generating assets with its power marketing businesses through energy sales in energy markets and fuel supply functions primarily in the Northeast and Mid-Atlantic United States through its principal subsidiaries. In addition, Power owns and operates solar generation in various states.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of PEG – July 2017

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 $22,395,447,722 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.87 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 -6.31% Fail
6. Moderate PEmg Ratio PEmg < 20 16.40 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.54 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 0.87 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -27.59 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 $2.68
MG Growth Estimate -0.11%
MG Value $22.19
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $38.84
MG Value based on 0% Growth $22.77
Market Implied Growth Rate 3.95%
Current Price $43.94
% of Intrinsic Value 197.99%

Public Service Enterprise Group Inc. 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, and the high PB 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 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 $2.7 in 2013 to an estimated $2.68 for 2017.  This level of demonstrated earnings growth does not support the market’s implied estimate of 3.95% 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 Public Service Enterprise Group Inc. revealed the company was trading above its Graham Number of $41.68.  The company pays a dividend of $1.64 per share, for a yield of 3.7%, putting it among the best dividend paying stocks today.  Its PEmg (price over earnings per share – ModernGraham) was 16.4, which was below the industry average of 24.79, 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 $-63.05.

Public Service Enterprise Group Inc. 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) -$63.05
Graham Number $41.68
PEmg 16.40
Current Ratio 0.87
PB Ratio 4.54
Current Dividend $1.64
Dividend Yield 3.73%
Number of Consecutive Years of Dividend Growth 5

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2017
Total Current Assets $2,716,000,000
Total Current Liabilities $3,111,000,000
Long-Term Debt $10,898,000,000
Total Assets $39,664,000,000
Intangible Assets $122,000,000
Total Liabilities $34,744,000,000
Shares Outstanding (Diluted Average) 508,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.97
Dec2016 $1.75
Dec2015 $3.30
Dec2014 $2.99
Dec2013 $2.45
Dec2012 $2.51
Dec2011 $2.96
Dec2010 $3.08
Dec2009 $3.14
Dec2008 $2.34
Dec2007 $2.62
Dec2006 $1.46
Dec2005 $1.35
Dec2004 $1.52
Dec2003 $2.54
Dec2002 $0.57
Dec2001 $1.84
Dec2000 $1.79
Dec1999 -$0.19
Dec1998 $1.40
Dec1997 $1.21

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.68
Dec2016 $2.56
Dec2015 $2.92
Dec2014 $2.75
Dec2013 $2.70
Dec2012 $2.82
Dec2011 $2.92
Dec2010 $2.78
Dec2009 $2.48
Dec2008 $2.05
Dec2007 $1.90
Dec2006 $1.53
Dec2005 $1.56
Dec2004 $1.66
Dec2003 $1.59
Dec2002 $1.10
Dec2001 $1.32

Recommended Reading:

Other ModernGraham posts about the company

Public Service Enterprise Group Inc. Analysis – 2015 Update $PEG
Public Service Enterprise Group Inc. Annual Valuation – 2014 $PEG

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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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