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 Regal-Beloit Corporation (NYSE:RBC)fares in the ModernGraham valuation model.
RBC data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7
- 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 - PASS
- 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 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- 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 - PASS
- 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 - PASS
|Value Based on 3% Growth||$51.70|
|Value Based on 0% Growth||$30.31|
|Market-Implied Growth Rate||6.42%|
Balance Sheet - 12/28/2013
Earnings Per Share
Earnings Per Share - ModernGraham
RBC Dividend data by YCharts
Regal-Beloit Corporation is suitable for either the Defensive Investor or Enterprising Investor. The only test for either investor type that the company did not pass was the Defensive Investor's PEmg requirement. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research, including a review of 5 Outstanding Dow Components and 5 Low PEmg Companies for the Enterprising Investor.
From a valuation standpoint, the company does not fare as well after poor growth in EPSmg (normalized earnings) from $3.19 in 2009 to $3.57 for 2013. This low level of historically demonstrated growth does not support the market's current implied estimate of growth of 6.42%, leading the ModernGraham valuation model to return an estimate of intrinsic value that trails the current 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 Regal-Beloit Corporation? Where do you see the company going in the future?
Disclosure: The author did not hold a position in Regal-Beloit Corporation (RBC) 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.