Here's a comparison of how Apple (AAPL), Google (GOOG) and Microsoft (MSFT) fare in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of Defensive Investors 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:
|Adequate Size of Enterprise - market capitalization of at least $2 billion||Pass||Pass||Pass|
|Sufficiently Strong Financial Condition - current ratio greater than 2||Fail||Pass||Pass|
|Earnings Stability - positive earnings per share for at least 10 straight years||Pass||Pass||Pass|
|Dividend Record - has paid a dividend for at least 10 straight years||Fail||Fail||Pass|
|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||Pass||Pass|
|Moderate PEmg ratio - PEmg is less than 20||Pass||Fail||Pass|
|Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50||Fail||Fail||Fail|
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor:
|Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5||Pass||Pass||Pass|
|Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1||Pass||Pass||Pass|
|Earnings Stability - positive earnings per share for at least 5 years||Pass||Pass||Pass|
|Dividend Record - currently pays a dividend||Pass||Fail||Pass|
|Earnings growth - EPSmg greater than 5 years ago||Pass||Pass||Pass|
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|MG Opinion||Undervalued||Fairly Valued||Fairly Valued|
|Value Based on 3% Growth||$481.18||$467.33||$35.28|
|Value Based on 0% Growth||$282.07||$273.95||$20.68|
|Market Implied Growth Rate||4.28%||12.21%||3.47%|
|Net Current Asset Value (NCAV)||-$11.30||$139.99||$4.64|
Earnings Per Share
|2014||not yet estimated||not yet estimated||$2.54|
Earnings Per Share - Modern Graham
|2014||not yet estimated||not yet estimated||$2.43|
All three companies have done well in recent years, and would be suitable for Enterprising Investors. However, only Microsoft qualifies for the Defensive Investor. Apple fails to qualify due to its low current ratio, lack of a long enough dividend history and high PB ratio. Google fails to qualify due to its lack of a long enough dividend history and high PEmg and PB ratios. Since the Defensive Investor's goal is to only seek out companies with extremely low risk, requirements are very difficult to meet. The Enterprising Investor is willing to take on more risk because he/she has more time to do further research, and as a result, the requirements are not as stringent. In this case, both Apple and Microsoft pass all 5 of the requirements of the Enterprising Investor, and Google only fails the requirement of paying dividends. As a result, Enterprising Investors should feel comfortable continuing with the evaluation of these companies.
With regard to valuation, ModernGraham put these three companies through its valuation model recently, and you may wish to peruse ModernGraham's valuation of Apple, ModernGraham's valuation of Google and ModernGraham's valuation of Microsoft. In summary, each company has successfully grown its earnings substantially over the reviewed historical period. However, Apple's level of growth far surpasses both Google and Microsoft and the company would appear to be undervalued versus its competitors.
What do you think? Which of these three companies would you recommend? Will any of the three be able to grab market share from the others in the coming years? Share your thoughts in the comments below.
Disclosure: The author was long Apple at the time of publication but had no intention of changing his position within the next 72 hours. The author did not hold a position in either Google or Microsoft at the time of publication and had no intention of entering a position in either company within the next 72 hours.