ModernGraham Annual Valuation Nasdaq OMX Group - 2014

Mar.23.14 | About: Nasdaq Inc. (NDAQ)

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 Nasdaq OMX Group fares in the ModernGraham valuation model.

NDAQ Chart

NDAQ 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 - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  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 = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  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 $37.54
MG Value $31.29
MG Opinion Overvalued
Value Based on 3% Growth $29.89
Value Based on 0% Growth $17.52
Market Implied Growth Rate 4.86%
Net Current Asset Value (NCAV) -$19.07
PEmg 18.21
Current Ratio 1.13
PB Ratio 1.03
Click to enlarge

Balance Sheet - 12/31/2013

Current Assets $3,163,000,000
Current Liabilities $2,800,000,000
Total Debt $2,589,000,000
Total Assets $12,577,000,000
Intangible Assets $8,572,000,000
Total Liabilities $6,393,000,000
Outstanding Shares 169,360,000
Click to enlarge

Earnings Per Share

2013 $2.25
2012 $2.04
2011 $2.15
2010 $1.91
2009 $1.24
2008 $1.56
2007 $3.46
2006 $0.95
2005 $0.57
2004 -$0.14
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Earnings Per Share - ModernGraham

2013 $2.06
2012 $1.90
2011 $1.91
2010 $1.80
2009 $1.69
2008 $1.70
Click to enlarge

Dividend History

NDAQ Dividend Yield (NYSE:<a href='http://seekingalpha.com/symbol/TTM' title='Tata Motors Limited'>TTM</a>) Chart

NDAQ Dividend Yield (TTM) data by YCharts

Conclusion:

Nasdaq OMX Group does not satisfy the requirements of either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the turn offs are the poor current ratio, the lack of earnings stability over the ten year period, and the lack of a long enough dividend history. For the Enterprising Investor, the company fails because of the high level of debt relative to the current assets. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities, through a review of ModernGraham's valuation of Intercontinental Exchange Group (NYSE:ICE) and 5 Undervalued Companies for the Enterprising Investor.

From a valuation perspective, the company appears to be overvalued, after growing its EPSmg (normalized earnings) from $1.69 in 2009 to $2.06 in 2013. This demonstrated level of growth does not support the market's implied estimate of 4.86% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below a margin of safety relative to the 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 Nasdaq OMX 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 Nasdaq OMX Group (NASDAQ:NDAQ) 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.