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Here is a look at how Verizon (NYSE:VZ) 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 = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  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 – PASS
  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 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  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 (Calculator)

Key Data:

MG Value $100
MG Opinion Undervalued
Value Based on 3% Growth $47
Value Based on 0% Growth $27
Market Implied Growth Rate 3.56%
Net Current Asset Value (NCAV) -$56.61
PEmg 15.63
Current Ratio 2.43
PB Ratio 4.27

Balance Sheet – 9/30/2013

Current Assets $73,705,000,000
Current Liabilities $30,291,000,000
Total Debt $90,938,000,000
Total Assets $276,675,000,000
Intangible Assets $106,574,000,000
Total Liabilities $241,690,000,000
Outstanding Shares 2,967,610,000

Earnings Per Share – Diluted

2013 (estimate) $2.85
2012 $3.69
2011 $3.59
2010 $3.61
2009 $1.29
2008 $2.26
2007 $1.90
2006 $1.88
2005 $2.65
2004 $2.59
2003 $1.27
2002 $1.67

Earnings Per Share – Modern Graham

2013 (estimate) $3.22
2012 $3.23
2011 $2.85
2010 $2.38
2009 $1.84
2008 $2.16

Conclusion:

Verizon Communications appears to be a solid opportunity worthy of further research by both Defensive Investors and Enterprising Investors. The only significant concern is that the EPS for 2013 is estimated to be down significantly from the last few years; however, it does not drag the EPSmg (normalized earnings) down enough to negatively affect the result. The company passes all of the requirements for the Defensive Investor, proving it has strong financials, and it also passes all of the requirements for the Enterprising Investor. As a result, these types of investors should pay close attention to the company and do further research to determine if it is suitable for their individual portfolios, keeping in mind the 7 Key Tips to Value Investing. From a valuation standpoint, the company fares well in the ModernGraham valuation model after having grown its EPSmg from $2.16 in 2008 to an estimated $3.22 in 2013. Since this level of proven historical growth outpaces the growth implied by the market, it is possible Verizon is undervalued.

What do you think? Is Verizon Communications undervalued? Is the company suitable for both Defensive Investors and Enterprising Investors? Leave a comment or mention @ModernGraham on Twitter to discuss.

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

Source: ModernGraham Valuation: Verizon Communications