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 Verizon Communications fares in the ModernGraham valuation model.
VZ 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 - PASS
- 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 - 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 = 3/5
- 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 - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
|Value Based on 3% Growth||$25.98|
|Value Based on 0% Growth||$15.23|
|Market Implied Growth Rate||8.95%|
|Net Current Asset Value (NCAV)||-$55.35|
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
VZ Dividend data by YCharts
Verizon Communications is not suitable for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company has not shown sufficient earnings growth over the ten year historical period, and is trading at too high PEmg and PB ratios. For the Enterprising Investor, the company has too much debt relative to its current assets and has not grown its EPSmg (normalized earnings) over the five year historical period. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities, such as by reviewing 5 Low PEmg Companies for the Enterprising Investor and 5 Undervalued Companies for the Enterprising Investor.
From a valuation perspective, the company does not fare well, after seeing EPSmg fall from $1.84 in 2009 to $1.79 in 2013. This demonstrated lack of earnings growth, does not support the market's implied growth rate estimate of 8.95%, and the ModernGraham valuation model returns an intrinsic value estimate that is significantly below the market 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 Verizon Communications? 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 Verizon Communications (NYSE:VZ) 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.