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 MTS Systems Corporation fares in the ModernGraham valuation model.
MTSC data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - FAIL
- 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 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- 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 - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
|Value Based on 3% Growth||$48.44|
|Value Based on 0% Growth||$28.40|
|Market-implied growth rate||5.95%|
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
MTSC Dividend data by YCharts
MTS Systems Corp passes all of the requirements of the Enterprising Investor, but does not qualify for the Defensive Investor. For that investor type, the company's overall size is too small, the current ratio is too low, and it is trading at high PEmg and PB ratios. As a result, Enterprising Investors should feel comfortable proceeding with further research into the company and its competitors, including a review of 5 Undervalued Companies for the Enterprising Investor and 5 Low PEmg Companies for the Enterprising Investor.
From a valuation side of things, the company looks very strong after growing its EPSmg (normalized earnings) from $1.63 in 2010 to an estimated $3.34 for 2014. This demonstrated level of growth outpaces the market's implied estimate of 5.95% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above 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 MTS Systems Corporation? 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 MTS Systems Corporation (NASDAQ:MTSC) 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.