It is so easy for investors to see a company with rapidly growing earnings and jump right on board the speculating train, but it is critical for Intelligent Investors to take the time to do fundamental analysis in order to calculate an intrinsic value of a company. Only through comparing the company's intrinsic value to the market place can an investor truly get a sense of whether the company is a good investment. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how IntercontinentalExchange Group fares in the ModernGraham valuation model.
ICE data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7
- 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 - 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 - PASS
- 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 = 4/5
- 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 - PASS
- 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 - PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$101.93|
|Value Based on 0% Growth||$59.75|
|Market Implied Growth Rate||10.60%|
|Net Current Asset Value (NCAV)||$7.50|
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
IntercontinentalExchange Group has demonstrated an excellent level of earnings growth, and its financial statements indicate a company that is suitable for Enterprising Investors. The company does not qualify for Defensive Investors because of a low current ratio, lack of a dividend payment history, and high PEmg and PB ratios. Enterprising Investors are not quite as picky, though, and the company only fails the Enterprising Investor's current ratio requirement. As a result, value investors falling into the Enterprising Investor category and seeking to follow Benjamin Graham's methods should feel comfortable proceeding with further research into the company to determine whether it is suitable for their individual portfolio. One source of additional research may be to review other companies that pass the ModernGraham requirements.
From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $2.90 in 2008 to an estimated $7.03 for 2013. This is a very solid level of growth that falls in line with what the market is currently implying as an estimate. Accordingly, the ModernGraham valuation model returns an intrinsic value that is within the margin of safety as the market price and the company appears to be fairly valued.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on IntercontinentalExchange Group Inc.? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in IntercontinentalExchange Group Inc. (ICE) 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.