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 Psychemedics (NASDAQ:PMD) Corp fares in the ModernGraham valuation model.
PMD 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 - PASS
- 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 - FAIL
- 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||$8.87|
|Value Based on 0% Growth||$5.20|
|Market Implied Growth Rate||10.19%|
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
PMD Dividend data by YCharts
Psychemedics Corp is a very small company that is not suitable for the Defensive Investor, but does pass all of the requirements of the Enterprising Investor. While the small size of the company is not enough to eliminate it from contention for the Defensive Investor, the company also has not shown sufficient earnings growth over the ten year period and has high PEmg and PB ratios. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company. From a valuation perspective, the company appears to be overvalued currently, after growing its EPSmg (normalized earnings) from $0.60 in 2009 to only $0.61 in 2013. This very low level of demonstrated growth does not support the market's implied estimate of 10.19% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.
Disclaimer: The author did not hold a position in Psychemedics Corp 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.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.