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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 PG&E Corp. (NYSE:PCG) fares in the ModernGraham valuation model.

PCG Chart

PCG data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7

  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 - 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 - FAIL
  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 - 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 - FAIL

Valuation Summary

Key Data:

Recent Price$44.70
MG OpinionOvervalued
Value Based on 3% Growth$30.90
Value Based on 0% Growth$18.12
Market Implied Growth Rate6.24%
Net Current Asset Value (NCAV)-$77.27
PEmg20.97
Current Ratio0.80
PB Ratio1.42

Balance Sheet - 12/31/2013

Current Assets$5,977,000,000
Current Liabilities$7,493,000,000
Total Debt$12,717,000,000
Total Assets$55,605,000,000
Intangible Assets$0
Total Liabilities$41,263,000,000
Outstanding Shares456,670,000

Earnings Per Share

2013$1.83
2012$1.92
2011$2.10
2010$2.82
2009$3.20
2008$3.22
2007$2.78
2006$2.76
2005$2.34
2004$8.97

Earnings Per Share - ModernGraham

2013$2.13
2012$2.41
2011$2.71
2010$2.99
2009$3.01
2008$3.28

Dividend History

PCG Dividend Chart

PCG Dividend data by YCharts

Conclusion:

PG&E is not suitable for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company has a low current ratio, not a stable enough dividend history (the company did not pay a dividend in 2004), has not shown sufficient growth in earnings over the ten-year period, and has a high PEmg ratio. For the Enterprising Investor, the company holds too much debt relative to current assets, and has not shown growth in the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities for investment. From a valuation standpoint, the lack of growth in EPSmg (normalized earnings) is very concerning as the demonstrated growth does not support the market's implied estimate of 6.24% earnings growth. The ModernGraham valuation model has indicated the intrinsic value is well below the market price at this time.

Disclaimer: The author did not hold a position in PG&E Corp (PCG) 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 PG&E Corp.