ModernGraham Quarterly Valuation Of Graham Holdings Company

| About: Graham Holdings (GHC)

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 Graham Holdings Company fares in the ModernGraham valuation model.

GHC Chart

GHC data by YCharts

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 – FAIL
  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 – FAIL
  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 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
  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 – PASS

Valuation Summary

Key Data:

Recent Price $717.95
MG Value $175.69
MG Opinion Overvalued
Value Based on 3% Growth $268.01
Value Based on 0% Growth $157.11
Market-Implied Growth Rate 15.17%
NCAV -$109.42
PEmg 38.84
Current Ratio 1.82
PB Ratio 1.61

Balance Sheet – 12/31/2013

Current Assets $1,702,400,000
Current Liabilities $934,100,000
Total Debt $447,600,000
Total Assets $5,811,000,000
Intangible Assets $1,869,500,000
Total Liabilities $2,511,000,000
Outstanding Shares 7,390,000

Earnings Per Share

2013 $25.78
2012 $6.09
2011 $15.23
2010 $34.26
2009 $9.78
2008 $6.87
2007 $30.19
2006 $34.21
2005 $32.59
2004 $34.59
Earnings Per Share – ModernGraham
2013 $18.48
2012 $14.71
2011 $19.10
2010 $21.71
2009 $17.86
2008 $23.83

Dividend History

GHC Dividend Chart

GHC Dividend data by YCharts


Graham Holdings Company is suitable for the Enterprising Investor but not the Defensive Investor. For the Defensive Investor, the company has a current ratio that is too low, a PEmg ratio that is too high, and has shown insufficient earnings growth over the ten year period. The company passes all requirements of the Enterprising Investor. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research, including a review of 5 Undervalued Companies for the Defensive Investor and a Glance at the Dow. As for the valuation, the company appears significantly overvalued as the earnings have not kept up with the recent rise in price. EPSmg (normalized earnings) have gone from $17.86 in 2009 to only $18.48, a level of demonstrated growth that does not support the market’s current implied estimate of 15.17% earnings growth. This leads the ModernGraham valuation model to return an estimate for intrinsic value that is well below the market price at this time.

Disclaimer: The author held a position in Deere & Co. (NYSE:DE) but none 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.