ModernGraham Annual Valuation Of OneOK Inc.

by: Benjamin Clark

When a company has seen a lengthy rise in price, some investors have a tendency to believe that it must be a good investment because it keeps going up. However, this is a common way of engaging in rampant speculation, and as Benjamin Graham taught, speculating has only a very limited role in investing. Intelligent Investors know to do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. 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 OneOK Inc. fares in the ModernGraham valuation model.

OKE data by YCharts

Defensive Investor - Must pass at least six of the following seven 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 - PASS
  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 one-third over the last 10 years using three-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 - FAIL

Enterprising Investor - Must pass at least 4 of the following 5 tests to be suitable for a defensive investor: Score = 3/5

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

Valuation Summary

Key Data:

Recent Price $59.62
MG Value $21.46
MG Opinion Overvalued
Value Based on 3% Growth $24.18
Value Based on 0% Growth $14.17
Market Implied Growth Rate 13.63%
NCAV -$60.79
PEmg 35.76
Current Ratio 1.10
PB Ratio 5.62
Click to enlarge

Balance Sheet - 9/30/2013

Current Assets $2,882,000,000
Current Liabilities $2,621,700,000
Total Debt $7,757,200,000
Total Assets $17,610,300,000
Intangible Assets $990,500,000
Total Liabilities $15,420,600,000
Outstanding Shares 206,270,000
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Earnings Per Share

2013 $1.78
2012 $1.64
2011 $1.67
2010 $1.55
2009 $1.44
2008 $1.47
2007 $1.40
2006 $1.34
2005 $1.87
2004 $1.15
2003 $1.07
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Earnings Per Share - ModernGraham

2013 $1.67
2012 $1.59
2011 $1.55
2010 $1.47
2009 $1.46
2008 $1.46
Click to enlarge

Dividend History

OKE Dividend data by YCharts

Conclusion:

OneOK is not suitable for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company fails the requirements for current ratio, earnings growth over the 10-year historical period, PEmg ratio and PB ratio. For the Enterprising Investor, the company has too much debt relative to its 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 through a review of 5 Low PE Companies for the Defensive Investor or 5 Undervalued Companies for the Enterprising Investor. As for valuation, the company has only grown its EPSmg (normalized earnings) from $1.46 in 2008 to $1.67 for 2013. This low level of demonstrated historical growth does not support the market's implied estimate for earnings growth of 13.63%, and the ModernGraham valuation model returns an estimate of intrinsic value that is below the market price, indicating the company is currently overvalued.

Disclaimer: The author did not hold a position in OneOK Inc. 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.