Here is a look at how Entergy Corp (ETR) 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 = 5/7
- 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 - PASS
- 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 - PASS
- 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 - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $32 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $78 |
| Value Based on 0% Growth | $46 |
| Market Implied Growth Rate | 1.48% |
| Net Current Asset Value (NCAV) | -$170.11 |
| PEmg | 11.46 |
| Current Ratio | 1.01 |
| PB Ratio | 1.16 |
Balance Sheet - 9/30/2013
| Current Assets | $3,489,600,000 |
| Current Liabilities | $3,439,000,000 |
| Total Debt | $12,308,300,000 |
| Total Assets | $43,324,100,000 |
| Intangible Assets | $377,200,000 |
| Total Liabilities | $33,821,700,000 |
| Outstanding Shares | 178,310,000 |
Earnings Per Share - Diluted
| 2013 (estimate) | $3.73 |
| 2012 | $4.89 |
| 2011 | $7.67 |
| 2010 | $6.76 |
| 2009 | $6.39 |
| 2008 | $6.20 |
| 2007 | $5.60 |
| 2006 | $5.36 |
| 2005 | $4.40 |
| 2004 | $3.93 |
| 2003 | $3.42 |
| 2002 | $2.64 |
Earnings Per Share - Modern Graham (Calculating EPSmg)
| 2013 (estimate) | $5.41 |
| 2012 | $6.29 |
| 2011 | $6.84 |
| 2010 | $6.30 |
| 2009 | $5.91 |
| 2008 | $5.48 |
Conclusion:
Entergy Corporation fails to pass the requirements for either the Defensive Investor or the Enterprising Investor. The company's current ratio is too low for either investor type and the earnings growth have not been strong. The EPSmg (normalized earnings) in 2008 was $5.48 and will only be an estimated $5.41 in 2013. As a result, value investors following Benjamin Graham's techniques from The Intelligent Investor should not invest in Entergy at this time unless they find a compelling reason otherwise while doing further research. From purely a valuation perspective, the company appears to be overvalued at this time as well. The poor earnings growth history does not support the market's implied estimate of 1.48% growth, even though that figure is seemingly low.
What do you think? Is Entergy Corp is overvalued? Is the company not suitable for either Defensive Investors or Enterprising Investors?
Disclosure: The author did not hold a position in Entergy Corp at the time of publication and had no intention of entering into a position within the next 72 hours.
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