Seeking Alpha
Follows Benjamin Graham method, deep value, value, long only
Profile| Send Message|
( followers)  

Here is a look at how American Electric Power (NYSE:AEP) 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 = 5/7

  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 - FAIL
  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 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  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 - 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$26
MG OpinionOvervalued
Value Based on 3% Growth$43
Value Based on 0% Growth$25
Market Implied Growth Rate3.78%
Net Current Asset Value (NCAV)-$71.59
Current Ratio0.76
PB Ratio1.48

Balance Sheet - 9/30/2013

Current Assets$4,317,000,000
Current Liabilities$5,692,000,000
Total Debt$16,202,000,000
Total Assets$54,963,000,000
Intangible Assets$91,000,000
Total Liabilities$39,201,000,000
Outstanding Shares487,260,000

Earnings Per Share - Diluted

2013 (estimate)$2.86

Earnings Per Share - Modern Graham

2013 (estimate)$2.99


American Electric Power Company is a large utility company that pays a healthy dividend, but like many other companies we've reviewed recently, its debt is too large to pass the requirements of either a Defensive Investor or an Enterprising Investor. In addition, the company has failed to grow its earnings, with EPSmg (normalized earnings) of $2.95 in 2008 and only $2.99 estimated for 2013. Even though the company has good dividends and may be attractive from that angle, the lack of earnings growth may mean that it may not be sustainable to grow dividends as well. As a result, the company appears to be speculative from a ModernGraham perspective. From a valuation standpoint, the company's lack of growth affects the valuation as well, and the company appears to be overvalued by a market that is implying the company will grow at 3.78%.

Disclaimer: The author did not hold a position in American Electric Power Company at the time of publication and had no intention of entering into a position in the next 72 hours.

Source: ModernGraham Valuation Of American Electric Power