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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 Teradata Corporation fares in the ModernGraham valuation model.

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Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  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 - PASS
  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 - PASS
  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 or be suitable for a defensive investor: Score = 4/5

  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 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - FAIL
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$45.92
MG Value$60.94
MG OpinionFairly Valued
Value Based on 3% Growth$31.18
Value Based on 0% Growth$18.28
Market Implied Growth Rate6.43%
NCAV$2.03
PEmg21.35
Current Ratio2.01
PB Ratio3.94

Balance Sheet - 12/31/2013

Current Assets$1,563,000,000
Current Liabilities$776,000,000
Total Debt$248,000,000
Total Assets$3,096,000,000
Intangible Assets$1,290,000,000
Total Liabilities$1,239,000,000
Outstanding Shares159,300,000

Earnings Per Share

2013$2.27
2012$2.44
2011$2.05
2010$1.77
2009$1.46
2008$1.39
2007$1.10
2006$1.06
2005$1.14
2004$0.76

Earnings Per Share - ModernGraham

2013$2.15
2012$2.00
2011$1.71
2010$1.47
2009$1.29
2008$1.17

Conclusion:

Teradata Corporation appears suitable for the Enterprising Investor but not the Defensive Investor due to the lack of dividend payments and the high PEmg and PB ratios. The Enterprising Investor's only concern is the lack of dividend payments, which is not enough of a concern by itself to eliminate the company from potential investment. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company. Such research should include comparison to other opportunities such as through a review of ModernGraham's valuation of International Business Machines (NYSE:IBM) and ModernGraham's valuation of Oracle (NYSE:ORCL).

From a valuation perspective, the company appears fairly valued, having grown its EPSmg (normalized earnings) from $1.29 in 2009 to $2.15 for 2013. This is a solid level of growth that supports the market's implied estimate of earnings growth in the amount of 6.43%, leading the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety in relation to the price.

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 Teradata Corporation? 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 Teradata Corporation (NYSE:TDC) 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: ModernGraham Quarterly Valuation Of Teradata Corporation