Here is a look at how Devon Energy Corp (NYSE:DVN) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):
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 – 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 – 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 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- 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 – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|Value Based on 3% Growth||$18.61|
|Value Based on 0% Growth||$10.91|
|Market Implied Growth Rate||19.04%|
Balance Sheet – 9/30/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Devon Energy Corp is a company that has had some very wide swings in the business cycle, including three negative years out of the last ten. It is this earnings instability, along with a poor current ratio and a high PEmg ratio that disqualifies the company from the Defensive Investor’s selection. For the Enterprising Investor, the lack of earnings stability and high debt relative to current assets eliminates the company from further consideration. Therefore, value investors seeking to follow Benjamin Graham’s methods should seek other opportunities, such as by reviewing ModernGraham’s valuations of Exxon Mobil (NYSE:XOM) and Conoco Phillips (NYSE:COP).
As for a valuation, the company has grown its EPSmg (normalized earnings) from -$1.27 in 2009 to an estimated $1.28 for 2013. However, the market is currently implying a growth rate estimate of 19.04%, a rate which is not quite supported by the company’s historical growth. As a result, the company appears to be overvalued currently.
What do you think? Do you agree that Devon Energy Corp is overvalued? Is the company not suitable for Defensive Investors or Enterprising Investors? Is there a company you like better?
Disclosure: The author did not hold a position in Devon Energy Corp (DVN) 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.