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Here is a look at how Procter & Gamble Co (NYSE:PG) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (explanation of the ModernGraham valuation model):

Key Data:

MG Value$45.53
MG OpinionOvervalued
Value Based on 3% Growth$55.53
Value Based on 0% Growth$32.55
Market Implied Growth Rate6.65%
Current Ratio0.79
PB Ratio3.33

Balance Sheet - 9/30/2013 (an Introduction to the Balance Sheet)

Current Assets$26,322,000,000
Current Liabilities$33,217,000,000
Total Debt$18,480,000,000
Total Assets$141,125,000,000
Intangible Assets$87,589,000,000
Total Liabilities$73,038,000,000
Outstanding Shares2,718,230,000

Earnings Per Share - Diluted

2014 (estimate)$4.25

Earnings Per Share - Modern Graham

2014 (estimate)$3.83


Procter and Gamble has a very poor current ratio, which is a key fundamental analysis ratio in the requirements for Benjamin Graham Intelligent Investors. For Defensive Investors, the current ratio combined with the high PEmg and PB ratios eliminates this company from potential investment. For Enterprising Investors, those who are able to take on higher risk through further research, the company still qualifies as a possibility due to stable earnings growth and a strong dividend. From a valuation standpoint, however, the company appears overvalued. While earnings have consistently grown from an EPSmg (normalized earnings) of $3.30 in 2009 to an estimated $3.83 for fiscal year 2014, that growth is only at an average of 2.26% per year. The market is implying a growth rate of 6.65%, well over what has been seen historically. As a result, any Enterprising Investor considering investing in Procter & Gamble should do considerably more research to determine if it is a good time to invest in the company.

Disclaimer: The author did not hold a position in Procter & Gamble at the time of publication and had no intention of purchasing a position in the next 72 hours.

Source: ModernGraham Valuation Of Procter & Gamble