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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 Rowan Companies (NYSE:RDC) fares in the ModernGraham valuation model.

RDC Chart

RDC data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  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 - 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 - FAIL
  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 = 2/5

  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 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - FAIL
  5. Earnings growth - EPSmg greater than 5 years ago - FAIL

Valuation Summary

Key Data:

Recent Price$33.07
MG OpinionOvervalued
Value Based on 3% Growth$26.95
Value Based on 0% Growth$15.80
Market Implied Growth Rate4.65%
Net Current Asset Value (NCAV)-$12.50
PEmg17.79
Current Ratio4.31
PB Ratio0.84

Balance Sheet - 12/31/2013

Current Assets$1,528,900,000
Current Liabilities$354,600,000
Total Debt$2,008,700,000
Total Assets$7,975,800,000
Intangible Assets$0
Total Liabilities$3,082,000,000
Outstanding Shares124,240,000

Earnings Per Share

2013$2.03
2012$1.64
2011$1.07
2010$2.36
2009$3.24
2008$3.77
2007$4.31
2006$2.84
2005$1.97
2004$0.25

Earnings Per Share - ModernGraham

2013$1.86
2012$1.99
2011$2.42
2010$3.17
2009$3.46
2008$3.25

Conclusion:

Rowan Companies is not suitable for either the Defensive Investor or the Enterprising Investor. The company has not consistently paid a dividend over the last ten years, and has shown insufficient earnings growth over the ten year period for the Defensive Investor. For the Enterprising Investor, the company's lack of a dividend payment, high level of debt relative to the current assets, and insufficient earnings growth are all factors against the possibility of investment. 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 5 Undervalued Companies for the Defensive Investor and 5 Undervalued Companies for the Enterprising Investor.

From a valuation side of things, the company does not fare well. EPSmg (normalized earnings) have dropped from $3.46 in 2009 to $1.86. The market is implying an estimate of 4.65% earnings growth going forward, but the recent history of the company does not support that estimate, leading the ModernGraham valuation model to return an estimate of intrinsic value that falls well below a margin of safety relative to the current 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 Rowan Companies? 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 Rowan Companies (RDC) 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.

Source: ModernGraham Annual Valuation Of Rowan Companies - 2014