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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 Abbott Laboratories (NYSE:ABT) fares in the ModernGraham valuation model.

ABT Chart

ABT data by YCharts

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

  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 - PASS
  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 - PASS
  7. 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 = 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 - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - FAIL

Valuation Summary

Key Data:

Recent Price $39.71
MG Value $21.90
MG Opinion Overvalued
Value Based on 3% Growth $39.80
Value Based on 0% Growth $23.33
Market Implied Growth Rate 2.98%
Net Current Asset Value (NCAV) $0.95
PEmg 14.47
Current Ratio 2.02
PB Ratio 2.44

Balance Sheet - 12/31/2013

Current Assets $19,247,000,000
Current Liabilities $9,507,000,000
Total Debt $3,388,000,000
Total Assets $42,953,000,000
Intangible Assets $15,507,000,000
Total Liabilities $17,782,000,000
Outstanding Shares 1,548,100,000

Earnings Per Share

2013 $1.50
2012 $3.75
2011 $3.02
2010 $2.96
2009 $3.69
2008 $3.03
2007 $2.31
2006 $1.12
2005 $2.16
2004 $2.02
2003 $1.75

Earnings Per Share - ModernGraham

2013 $2.74
2012 $3.34
2011 $3.09
2010 $2.96
2009 $2.79
2008 $2.27

Dividend History

ABT Dividend Chart

ABT Dividend data by YCharts

Conclusion:

Abbott Labs is a very strong company at the initial stages of the ModernGraham analysis, having passed all of the requirements of the Defensive Investor. The company also passes the requirements of the Enterprising Investor, except for the requirement regarding earnings growth. Moving on to the valuation stage, the company does not fare well after exhibiting a lack of earnings growth over the last five years. EPSmg (normalized earnings) have gone from $2.79 in 2009 to $2.74 for 2014, and this lack of growth clearly does not support the market's implied estimate of 2.98% earnings growth going forward. Accordingly, the ModernGraham valuation model has returned an estimate of intrinsic value that falls below a margin of safety relative to the price.

Disclaimer: The author did not hold a position in Abbott Laboratories 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 Abbott