Atmos Energy Corp Valuation – Initial Coverage $ATO

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 Undervalued Stocks for the Enterprising Investor – August 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 Atmos Energy Corp (ATO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Atmos Energy Corporation is a fully-regulated, natural-gas-only distributor engaged primarily in the regulated natural gas distribution and pipeline businesses, as well as other nonregulated natural gas businesses. It operates through three segments: regulated distribution segment, which includes its regulated distribution and related sales operations; regulated pipeline segment, which includes pipeline and storage operations of its Atmos Pipeline-Texas Division, and nonregulated segment, which includes its nonregulated natural gas management, nonregulated natural gas transmission, storage and other services. Its nonregulated businesses provide natural gas management, transportation and storage services to local gas distribution companies, including certain of its natural gas distribution divisions and industrial customers in the Midwest and Southeast. It also manages its natural gas pipeline and storage assets, including its intrastate natural gas pipeline systems in Texas.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of ATO – August 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 $9,350,743,420 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.72 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 63.48% Pass
6. Moderate PEmg Ratio PEmg < 20 26.32 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.40 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 0.72 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -14.52 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 Pass

Stage 2: Determination of Intrinsic Value

EPSmg $3.35
MG Growth Estimate 5.96%
MG Value $68.41
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $48.58
MG Value based on 0% Growth $28.48
Market Implied Growth Rate 8.91%
Current Price $88.16
% of Intrinsic Value 128.87%

Atmos Energy Corporation 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, high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets.  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 $2.4 in 2013 to an estimated $3.35 for 2017.  This level of demonstrated earnings growth does not support the market’s implied estimate of 8.91% 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 Atmos Energy Corporation revealed the company was trading above its Graham Number of $53.23.  The company pays a dividend of $1.68 per share, for a yield of 1.9%  Its PEmg (price over earnings per share – ModernGraham) was 26.32, which was above the industry average of 24.79.  Finally, the company was trading above its Net Current Asset Value (NCAV) of $-57.

Atmos Energy Corporation 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) -$57.00
Graham Number $53.23
PEmg 26.32
Current Ratio 0.72
PB Ratio 2.40
Current Dividend $1.68
Dividend Yield 1.91%
Number of Consecutive Years of Dividend Growth 20


Useful Links:

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2017
Total Current Assets $534,382,000
Total Current Liabilities $745,659,000
Long-Term Debt $3,066,734,000
Total Assets $10,498,775,000
Intangible Assets $729,673,000
Total Liabilities $6,597,065,000
Shares Outstanding (Diluted Average) 106,364,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.78
Sep2016 $3.38
Sep2015 $3.09
Sep2014 $2.96
Sep2013 $2.64
Sep2012 $2.37
Sep2011 $2.27
Sep2010 $2.20
Sep2009 $2.07
Sep2008 $2.00
Sep2007 $1.92
Sep2006 $1.82
Sep2005 $1.69
Sep2004 $1.37
Sep2003 $1.39
Sep2002 $1.43
Sep2001 $1.47
Sep2000 $1.12
Sep1999 $0.58
Sep1998 $1.84
Sep1997 $0.81

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.35
Sep2016 $3.05
Sep2015 $2.81
Sep2014 $2.61
Sep2013 $2.40
Sep2012 $2.24
Sep2011 $2.15
Sep2010 $2.06
Sep2009 $1.96
Sep2008 $1.86
Sep2007 $1.74
Sep2006 $1.61
Sep2005 $1.50
Sep2004 $1.39
Sep2003 $1.33
Sep2002 $1.29
Sep2001 $1.21

Recommended Reading:

Other ModernGraham posts about the company

None.  This is the first time ModernGraham has covered the company.

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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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