Here is a look at how CBRE Group Inc. (CBG) 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 = 1/7
- 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 - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- 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 - FAIL
- 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 = 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 - FAIL
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$13.07|
|Value Based on 0% Growth||$7.66|
|Market Implied Growth Rate||10.31%|
|Net Current Asset Value (NCAV)||-$5.61|
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
CBRE Group Inc. is yet another company in a long line of recent reviews that is not suitable for either the Defensive Investor or the Enterprising Investor. It's important to note that one of the reasons we put companies through these requirements is to eliminate all but those that present the least amount of risk to investors. CBRE Group is no different; the company has not had stable earnings over the last ten years, does not pay dividends, has a poor current ratio, has not grown earnings over the ten-year period, and is trading at high PEmg and PB ratios. Defensive Investors and Enterprising Investors would be better suited looking at less risky companies that pass these tests.
From a valuation perspective, the company actually fares somewhat well, having grown EPSmg (normalized earnings) from -$0.76 in 2008 to an estimated $0.90 for 2013. The market is currently implying a growth rate of 10.31%, and that rate is supported by the historical performance. As a result, the company would appear to be fairly valued at the present time.
What do you think? Do you agree that CBRE Group Inc. is fairly valued? What would be your assessment? Is the company not suitable for Defensive Investors or Enterprising Investors?
Disclosure: The author did not hold a position in CBRE Group Inc. (CBG) at the time of publication and had no intention of changing that position within the next 72 hours.