Sometimes a company can see a stock price rise and remain undervalued, because the intrinsic value of the company is not related to the price at which it trades. Rather, the value of a company results from solid fundamentals. Benjamin Graham taught investors to analyze the company's financial statements to determine an intrinsic value for the company, then compare the price to the value. 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 investment opportunity. 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 Nabors Industries fares in the ModernGraham valuation model.
NBR 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 - PASS
- 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 - PASS
- 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 - FAIL
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
|Value Based on 3% Growth||$11.24|
|Value Based on 0% Growth||$6.59|
|Market Implied Growth Rate||10.30%|
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
NBR Dividend data by YCharts
Nabors Industries does not appear suitable for the Defensive Investor or the Enterprising Investor. The Defensive Investor does not accept this company because of its lack of earnings stability or growth over the ten year historical period, its lack of a solid dividend record, and its high PEmg ratio. The Enterprising Investor is turned off by the lack of earnings stability or growth over the five year historical period, along with the high level of debt relative to the company's current assets. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should research other opportunities, such as by a review of 5 Undervalued Companies for the Enterprising Investor. The company also fares poorly in the ModernGraham valuation model after shrinking its EPSmg (normalized earnings) from $2.49 in 2008 to $0.78 for 2013. This lack of earnings growth history certainly does not support the market's current implied estimate for earnings growth of 10.30%.
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 Nabors Industries? 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 Nabors Industries (NYSE:NBR) at the time of publication and had no intention of changing that position within the next 72 hours.