Here is a look at how AGL Resources (GAS) 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
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - 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 - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- 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 = 2/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|Value Based on 3% Growth||$37.25|
|Value Based on 0% Growth||$21.83|
|Market Implied Growth Rate||4.94%|
|Net Current Asset Value (NCAV)||-$69.78|
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - Modern Graham
AGL Resources Inc. does not qualify for either the Defensive Investor or the Enterprising Investor, due in part to its large level of debt relative to its current assets, but also as a result of its poor history of growth. This company may be suitable for those looking for a dividend, but if the company does not begin to see growth it is unlikely to be able to continue to grow dividends into the future. Defensive Investors and Enterprising Investors should proceed with researching other companies, starting with a review of the 5 Low-PE Companies.
As it stands, the company's EPSmg (normalized earnings) shrunk from $2.70 in 2008 to an estimated $2.57 for 2013. In the meantime, the market is implying a growth rate of 4.94%. Clearly the historical performance of the company does not support the market's estimate, and so from a valuation perspective the company would appear to be overvalued.
What do you think? Do you agree that AGL Resources Inc. is overvalued? What would be your assessment? Is the company not suitable for Defensive Investors and Enterprising Investors?
Disclosure: The author did not hold a position in AGL Resources Inc. (AGL) at the time of publication and had no intention of entering into a position within the next 72 hours.