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 Actavis fares in the ModernGraham valuation model.
ACT data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 1/7
- 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 - FAIL
- 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 - 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 = 0/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - FAIL
- Dividend Record - currently pays a dividend - FAIL
- Earnings growth - EPSmg greater than 5 years ago - FAIL
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
Actavis is not suitable for either the Defensive Investor or the Enterprising Investor. In fact, the company fails all five of the Enterprising Investor's requirements and only satisfies the Defensive Investor's requirement regarding size. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities through a review of 5 Low PEmg Companies for the Defensive Investor and a Glance at the Dow.
From a valuation standpoint, 2013′s significant loss throws a difficult wrench into the valuation model. Intelligent Investors are especially interested in seeking out companies that do not post losses, and at the very least companies that do not post losses so significant that they cause normalized earnings to fall negative as well. In this case, at this time any value in Actavis must come from a source other than the earnings, as the company has not demonstrated growth or the ability to maintain stable earnings. As a result, the ModernGraham valuation model estimates the company is presently overvalued.
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 Actavis? 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 Actavis (ACT) 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.