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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 Coca-Cola (NYSE:CCE) Enterprises fares in the ModernGraham valuation model.

CCE Chart

CCE data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 2/7

  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 - PASS
  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 - FAIL
  7. 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 = 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$47.68
MG Value$85.29
MG OpinionUndervalued
Value Based on 3% Growth$32.12
Value Based on 0% Growth$18.83
Market Implied Growth Rate6.51%
Net Current Asset Value (NCAV)-$18.16
PEmg21.52
Current Ratio1.17
PB Ratio5.39

Balance Sheet - 12/31/2013

Current Assets$2,568,000,000
Current Liabilities$2,195,000,000
Total Debt$3,726,000,000
Total Assets$9,525,000,000
Intangible Assets$4,128,000,000
Total Liabilities$7,245,000,000
Outstanding Shares257,600,000

Earnings Per Share

2013$2.44
2012$2.25
2011$2.29
2010$1.84
2009$1.48
2008-$9.06
2007$1.46
2006-$2.41
2005$1.08
2004$1.26

Earnings Per Share - ModernGraham

2013$2.22
2012$1.32
2011$0.44
2010-$0.77
2009-$1.88
2008-$2.88

Conclusion:

Coca-Cola Enterprises does not qualify for either the Defensive Investor or the Enterprising Investor. The company does not pass the Defensive Investor's requirements due to a low current ratio, insufficient earnings stability or growth over the ten-year period and high PEmg and PB ratios. The company does not qualify for the Enterprising Investor due to 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. In terms of a valuation, the company does appear to be undervalued after growing its EPSmg (normalized earnings) from -$1.88 in 2009 to $2.22. This demonstrated growth represents a growth level that surpasses the market's implied estimate of 6.51% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price.

Disclaimer: The author did not hold a position in Coca-Cola Enterprises Inc. or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Annual Valuation Of Coca-Cola Enterprises Inc.