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Here is a look at how Mohawk Industries (MHK) fares in ModernGrraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

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 – PASS
  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 – FAIL
  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 – 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 – FAIL
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $137.24
MG Opinion Fairly Valued
Value Based on 3% Growth $51.69
Value Based on 0% Growth $30.30
Market Implied Growth Rate 16.34%
Net Current Asset Value (NCAV) -$14.48
PEmg 41.17
Current Ratio 2.30
PB Ratio 2.46

Balance Sheet – 9/30/2013

Current Assets $3,188,500,000
Current Liabilities $1,385,200,000
Total Debt $2,257,400,000
Total Assets $8,564,200,000
Intangible Assets $2,525,000,000
Total Liabilities $4,239,700,000
Outstanding Shares 72,620,000

Earnings Per Share

2013 (estimate) $5.23
2012 $3.61
2011 $2.52
2010 $2.70
2009 -$0.08
2008 -$21.32
2007 $10.32
2006 $6.70
2005 $5.30
2004 $5.46
2003 $4.62

Earnings Per Share – ModernGraham

2013 (estimate) $3.56
2012 $0.98
2011 -$0.61
2010 -$1.56
2009 -$2.40
2008 -$1.94

Conclusion:

Mohawk Industries has seen some rapid growth over the last few years, but it does not qualify for either the Defensive Investor or the Enterprising Investor. The company’s earnings have lacked stability over the last 5-10 years, it does not pay a dividend, and it is trading at a high PEmg ratio. As a result, value investors seeking to follow Benjamin Graham’s methods should review other opportunities, while keeping in mind the 7 Key Tips to Value Investing. As for a valuation, the company has achieved a substantial level of growth over the last 5 years, having risen EPSmg (normalized earnings) from -$2.40 in 2009 to an estimated $3.56 for 2013. This level of growth provides some support to the market’s implied estimate for growth of 16.34%, and the company therefore appears to be fairly valued at the present time.

Disclaimer: The author did not hold a position in Mohawk Industries (MHK) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: Modern Graham Valuation Of Mohawk Industries