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Here is a look at how Chesapeake Energy Corporation (NYSE:CHK) 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 = 3/7

  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 - FAIL
  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 - FAIL
  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 = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  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 - FAIL
  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$5.11
MG OpinionOvervalued
Value Based on 3% Growth$1.92
Value Based on 0% Growth$1.13
Market Implied Growth Rate92.27%
Net Current Asset Value (NCAV)-$33.22
PEmg193.04
Current Ratio0.70
PB Ratio1.05

Balance Sheet - 9/30/2013

Current Assets$3,994,000,000
Current Liabilities$5,678,000,000
Total Debt$12,736,000,000
Total Assets$42,288,000,000
Intangible Assets$0
Total Liabilities$26,092,000,000
Outstanding Shares665,230,000

Earnings Per Share

2013 (estimate)$1.28
2012-$1.46
2011$2.09
2010$2.36
2009-$9.56
2008$1.14
2007$2.52
2006$4.15
2005$2.51
2004$1.53
2003$1.20

Earnings Per Share - ModernGraham

2013 (estimate)$0.13
2012-$0.66
2011-$0.27
2010-$0.92
2009-$1.66
2008$2.32

Conclusion:

Chesapeake Energy Corp has shown a good level of growth over the recent period, but it does not qualify for either the Defensive Investor or the Enterprising Investor. The company's current ratio is far too low for either investor type, the company has not had stable earnings or earnings growth over the ten year period, and the company is currently trading at a high PEmg ratio. Value investors such as these, seeking to follow Benjamin Graham's methods, should research other opportunities, including reviewing ModernGraham's valuation of Schlumberger Ltd (NYSE:SLB).

From a valuation perspective, the company appears overvalued despite its growth in EPSmg (normalized earnings) from $-1.66 in 2009 to an estimated $0.13 for 2013. The market is currently implying a growth estimate of 92% from the current EPSmg figure of $0.13, which is significantly higher growth than what has been demonstrated historically.

What do you think? Do you agree that Chesapeake Energy Corp is overvalued? 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 Chesapeake Energy Corp (CHK) at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Valuation Of Chesapeake Energy Corporation