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Here is a look at how Infosys Ltd. (NYSE:INFY) 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 = 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$59.24
MG OpinionFairly Valued
Value Based on 3% Growth$41.49
Value Based on 0% Growth$24.32
Market Implied Growth Rate5.48%
Net Current Asset Value (NCAV)$8.51
PEmg19.45
Current Ratio4.41
PB Ratio4.61

Balance Sheet - 9/30/2013

Current Assets$6,358,000,000
Current Liabilities$1,442,000,000
Total Debt$0
Total Assets$8,397,000,000
Intangible Assets$414,000,000
Total Liabilities$1,497,000,000
Outstanding Shares571,400,000

Earnings Per Share

2014 (estimate)$2.86
2013$3.02
2012$3.00
2011$2.62
2010$2.30
2009$2.24
2008$2.02
2007$1.50
2006$0.99
2005$0.77
2004$1.01
2003$0.37

Earnings Per Share - Modern Graham

2014 (estimate)$2.86
2013$2.79
2012$2.59
2011$2.30
2010$2.03
2009$1.77

Conclusion:

Infosys is an intriguing company that has exhibited consistent growth over the historical period. The company qualifies for both the Defensive Investor and the Enterprising Investor, having only disappointed the Defensive Investor by having a high PB ratio. Both investor types should feel comfortable continuing with further research, and should take a moment to review our valuations of IBM (ModernGraham Valuation) and Microsoft (NASDAQ:MSFT) (ModernGraham Valuation). From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.77 in 2009 to an estimated $2.86 for 2014. This level of growth is close to the 5.48% estimate implied by the market at the current time, and the company appears to be fairly valued.

What do you think? Do you agree that Infosys is fairly valued? Is the company suitable for both Defensive Investors and Enterprising Investors?

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

Source: ModernGraham Valuation Of Infosys Ltd.