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 Jacobs Engineering fares in the ModernGraham valuation model.
JEC 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 - 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 - FAIL
- 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 = 4/5
- 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 - FAIL
- Earnings growth - EPSmg greater than 5 years ago - PASS
|Value Based on 3% Growth||$45.39|
|Value Based on 0% Growth||$26.61|
|Market Implied Growth Rate||5.86%|
|Net Current Asset Value (NCAV)||-$1.32|
Balance Sheet - 12/27/2013
Earnings Per Share
Earnings Per Share - ModernGraham
Jacobs Engineering is suitable for the Enterprising Investor but not the Defensive Investor. The Defensive Investor is turned away by the low current ratio, insufficient dividend record, and high PEmg ratio. The Enterprising Investor is satisfied with the company except for the lack of dividend payments, but that alone is not enough to eliminate the company from potential investment. As a result, the Enterprising Investor following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research, including a look at 5 Undervalued Companies for the Defensive Investor as well as 5 Low PEmg Companies for the Enterprising Investor.
From a valuation perspective, the company appears to be overvalued presently. The EPSmg (normalized earnings) have grown from $2.61 in 2010 to only $3.13 estimated for 2014, a level of demonstrated growth that does not support the market's implied estimate of 5.86% earnings growth. The ModernGraham valuation model accordingly returns an estimate of intrinsic value that falls well 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 Jacobs Engineering Group? 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 Jacobs Engineering Group (NYSE:JEC) 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.