ModernGraham Valuation Of Natural Resource Partners L.P.

Dec.26.13 | About: Natural Resource (NRP)

Here is a look at how Natural Resource Partners L.P. (NYSE:NRP) 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 - 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 - FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $0.00 *Rare scenario; see conclusion
MG Opinion Overvalued
Value Based on 3% Growth $20.79
Value Based on 0% Growth $12.19
Market Implied Growth Rate 2.67%
NCAV -$10.75
PEmg 13.84
Current Ratio 1.67
PB Ratio 3.45
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Balance Sheet - 9/30/2013

Current Assets $139,100,000
Current Liabilities $83,120,000
Total Debt $1,088,900,000
Total Assets $1,950,600,000
Intangible Assets $1,451,000,000
Total Liabilities $1,319,200,000
Outstanding Shares 109,810,000
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Earnings Per Share

2013 (estimate) $1.44
2012 $2.01
2011 $0.50
2010 $1.54
2009 $1.69
2008 $2.62
2007 $1.88
2006 $2.97
2005 $3.20
2004 $2.19
2003 $1.63
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Earnings Per Share - Modern Graham

2013 (estimate) $1.43
2012 $1.51
2011 $1.39
2010 $1.94
2009 $2.25
2008 $2.54
Click to enlarge

Conclusion:

Natural Resource Partners L.P. does not fare well in the ModernGraham valuation model, after having dropped its EPSmg (normalized earnings) from $2.54 in 2008 to an estimated $1.43 for 2013. The company fails the requirements for both the Defensive Investor and the Enterprising Investor. For the Defensive Investor, the current ratio is not strong enough and the lack of earnings growth over the last ten years completely disappoints. For the Enterprising Investor, there is too much long-term debt and again the lack of earnings growth presents too great a risk. Either investor type should be very careful going forward and perhaps should consider looking at the 5 Undervalued Companies we looked at last weekend instead.

From a valuation perspective, the model looks very poorly upon shrinking earnings. The historical earnings do not currently support a positive valuation, but for reference the market is implying a growth rate of 2.67%. Since the earnings history cannot support the market's implied growth rate, any value must come from the balance sheet itself. We traditionally then turn to the net current asset value (NCAV) in that case, but here that is also negative. As a result, ModernGraham cannot calculate a value for Natural Resource Partners without engaging in speculation, and one of the 7 Key Tips to Value Investing is to avoid speculating.

What do you think? Do you agree that Natural Resource Partners L.P. is overvalued?

Disclosure: The author did not hold a position in Natural Resource Partners (NRP) at the time of publication and had no intention of entering into a position within the next 72 hours.