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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 or by reviewing 5 Undervalued Companies for the Defensive Investor. 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 Spectra Energy (NYSE:SE) fares in the ModernGraham valuation model.

(click to enlarge)

SE Chart

SE data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7

  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 – 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 – 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 $38.80
MG Value $26.03
MG Opinion Overvalued
Value Based on 3% Growth $22.51
Value Based on 0% Growth $13.20
Market Implied Growth Rate 8.24%
Net Current Asset Value (NCAV) -$34.27
PEmg 24.99
Current Ratio 0.52
PB Ratio 3.06

Balance Sheet – 12/31/2013

Current Assets $2,081,000,000
Current Liabilities $4,039,000,000
Total Debt $12,488,000,000
Total Assets $33,533,000,000
Intangible Assets $4,810,000,000
Total Liabilities $25,039,000,000
Outstanding Shares 670,000,000

Earnings Per Share

2013 $1.55
2012 $1.43
2011 $1.77
2010 $1.60
2009 $1.31
2008 $1.81
2007 $1.49

Earnings Per Share – ModernGraham

2013 $1.55
2012 $1.56
2011 $1.62
2010 $1.44
2009 $1.22
2008 $1.00

Dividend History

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SE Dividend Chart

SE Dividend data by YCharts

Conclusion:

Spectra Energy does not qualify for either the Defensive Investor or the Enterprising Investor. The only requirement of the Defensive Investor that the company passes is the market size while the Enterprising Investor is concerned with the high level of debt relative to the current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Exxon Mobil (NYSE:XOM) and 5 Outstanding Dow Components. From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.22 in 2009 to only $1.55 in 2013. This low level of demonstrated growth does not support the market’s implied estimate of 8.24% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is below the market 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 Spectra Energy Corp? Where do you see the company going in the future? Is there a company you like better?

Disclaimer: The author did not hold a position in Spectra Energy Corp 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 Spectra Energy Corp.