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Here is a look at how Haliburton (NYSE:HAL) 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 – 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 – 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 = 5/5

  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 – 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 $42
MG Opinion Overvalued
Value Based on 3% Growth $37
Value Based on 0% Growth $21
Market Implied Growth Rate 6.21%
Net Current Asset Value (NCAV) -$2.68
PEmg 20.92
Current Ratio 2.71
PB Ratio 3.49

Balance Sheet – 9/30/2013

Current Assets $12,890,000,000
Current Liabilities $4,762,000,000
Total Debt $7,816,000,000
Total Assets $27,948,000,000
Intangible Assets $2,125,000,000
Total Liabilities $15,160,000,000
Outstanding Shares 847,000,000

Earnings Per Share – Diluted

2013 (estimated) $2.33
2012 $2.78
2011 $3.26
2010 $1.97
2009 $1.28
2008 $2.17
2007 $2.66
2006 $2.16
2005 $2.27
2004 $0.44
2003 $0.39
2002 -$0.4

Earnings Per Share – Modern Graham (Calculating EPSmg)

2013 (estimated) $2.52
2012 $2.51
2011 $2.33
2010 $1.93
2009 $1.98
2008 $2.20

Conclusion:

Halliburton Company should be on the radar of both Defensive Investors and Enterprising Investors. It does not meet the requirements for the Defensive Investor at this time, but the only tests it failed were related to the PEmg ratio and the PB ratio (both are too high). As these tests are both related to the price, it is very possible the company could become suitable for Defensive Investors if the price were to drop a bit. Halliburton Company does pass all of the requirements of the Enterprising Investor, and as such this investor type should continue with further research. From a valuation standpoint, the company appears to be slightly overvalued. The EPSmg (normalized earnings) have grown from $2.20 in 2008 to an estimated $2.52 for 2013, a level of growth that does not support the market’s implied estimate of 6.21%.

What do you think? Is Halliburton Company overvalued? Is the company suitable only for Enterprising Investors? Leave a comment or mention @ModernGraham on Twitter to discuss.

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

Source: ModernGraham Valuation Of Halliburton Company