Here is a look at how MTS Systems (MTSC) 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 - FAIL
- 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 - PASS
- 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 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- 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 - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $72.79 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $42.60 |
| Value Based on 0% Growth | $24.97 |
| Market-implied growth rate | 7.79% |
| NCAV | $8.73 |
| PEmg | 24.08 |
| Current Ratio | 1.89 |
| PB Ratio | 4.25 |
Balance Sheet - 9/30/2013
| Current Assets | $329,300,000 |
| Current Liabilities | $174,200,000 |
| Total Debt | $0 |
| Total Assets | $451,300,000 |
| Intangible Assets | $36,300,000 |
| Total Liabilities | $194,700,000 |
| Outstanding Shares | 15,410,000 |
Earnings Per Share
| 2013 | $3.64 |
| 2012 | $3.21 |
| 2011 | $3.24 |
| 2010 | $1.14 |
| 2009 | $1.03 |
| 2008 | $2.68 |
| 2007 | $2.29 |
| 2006 | $2.02 |
| 2005 | $1.79 |
| 2004 | $1.35 |
| 2003 | $0.91 |
| 2002 | $1.04 |
Earnings Per Share - Modern Graham
| 2013 | $2.94 |
| 2012 | $2.48 |
| 2011 | $2.10 |
| 2010 | $1.63 |
| 2009 | $1.90 |
| 2008 | $2.24 |
Conclusion:
MTS Systems is an attractive company for the Enterprising Investor, having passed all of the requirements of the investor type. However, that is not the case for Defensive Investors. The company's current ratio is slightly below the threshold of the Defensive Investor, the PEmg and PB ratios are too high, and the company is too small for the Defensive Investor. As a result, only Enterprising Investors should feel comfortable proceeding with further research into the company, perhaps by beginning with a review of the ModernGraham Valuation of General Electric. From a valuation standpoint, the company has grown its EPSmg (normalized earnings) from $2.24 in 2008 to $2.94 in 2013. This level of earnings growth is in line with the market's implied estimate of 7.79%, and the company therefore seems to be fairly valued at this time.
What do you think? Do you agree that MTS Systems is fairly valued? Is the company suitable only for Enterprising Investors?
Disclosure: The author did not hold a position in MTS Systems (MTSC) at the time of publication and had no intention of entering into a position within the next 72 hours.
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