Benjamin Graham taught that Intelligent Investors must 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 Pitney Bowes (NYSE:PBI) fares in the ModernGraham valuation model.
PBI data by YCharts
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- 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 – PASS
- 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 – PASS
- 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 – FAIL
- 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 – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
Recent Price $25.09 MG Value $6.90 MG Opinion Overvalued Value Based on 3% Growth $25.48 Value Based on 0% Growth $14.94 Market Implied Growth Rate 2.89% NCAV -$18.54 PEmg 14.28 Current Ratio 1.27 PB Ratio 26.91
Balance Sheet – 12/31/2013
Current Assets $2,838,200,000 Current Liabilities $2,227,800,000 Total Debt $3,346,300,000 Total Assets $6,772,700,000 Intangible Assets $1,855,300,000 Total Liabilities $6,584,300,000 Outstanding Shares 202,080,000
Earnings Per Share
PBI Dividend data by YCharts
Pitney Bowes is not suitable for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company’s current ratio is too low, there has not been sufficient earnings growth over the ten year historical period, and the PB ratio is too high. For the Enterprising Investor, there is too much debt relative to the current assets and there has been insufficient earnings growth over the five year historical period. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should seek other opportunities, such as by reviewing 5 Low PEmg Companies for the Defensive Investor. From a valuation side of things, the company appears overvalued after seeing its EPSmg (normalized earnings) fall from $2.07 in 2009 to $1.76 for 2013. This lack of growth clearly does not support the market’s implied estimate of earnings growth of 2.89%, and the ModernGraham valuation model returns an intrinsic value estimate that is much lower than the current price.
Disclaimer: The author did not hold a position in Pitney Bowes (PBI) 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.