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 Consolidated Edison (NYSE:ED) fares in the ModernGraham valuation model.
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 - 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 - PASS
- 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 - PASS
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 - 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 - PASS
|Value Based on 3% Growth||$52.47|
|Value Based on 0% Growth||$30.76|
|Market-Implied Growth Rate||3.31%|
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
ED Dividend data by YCharts
Consolidated Edison is suitable for either the Defensive Investor or the Enterprising Investor. The company passes all of the requirements of the Defensive Investor except for the current ratio requirement, which is fairly expected for utility companies. The company qualifies for the Enterprising Investor by default, despite having a high level of debt relative to the current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research. From a valuation side of things, the company appears overvalued presently. EPSmg (normalized earnings) have only grown from $3.23 in 2009 to $3.62 for 2013, and this low level of growth does not support the market's implied estimate of 3.31% earnings growth. The ModernGraham valuation model returns an estimate of intrinsic value that falls below the market price.
Disclaimer: The author did not hold a position in Consolidated Edison 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.