Would Benjamin Graham Invest in Facebook?
NEW YORK (TheStreet) -- Famed value investor Benjamin Graham taught that investors must conduct a thorough fundamental analysis of securities to determine their intrinsic value and risk. Here's the beginning of such an analysis on Facebook (FB) - Get Report. (MG refers to "modern Graham.")
Defensive Investor - must pass at least six of the following seven tests: Score = 2/7
Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
Sufficiently Strong Financial Condition - ratio of current assets over current liabilities greater than 2 - PASS
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 - FAIL
Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using three-year averages at beginning and end of period - FAIL
Moderate PEmg ratio - PEmg is less than 20 - FAIL (PEmg is a price-to-earnings ratio that uses a weighted average of earnings per share from the last five years.)
Moderate Price to Assets - price-to-book 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 = 4/5
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 five years - PASS
Dividend Record - currently pays a dividend - FAIL
Earnings growth - EPSmg greater than five years ago - PASS
Valuation Summary
Key Data:
Recent Price | $58.02 |
MG Value | $21.30 |
MG Opinion | Overvalued |
Value Based on 3% Growth | $8.02 |
Value Based on 0% Growth | $4.70 |
Market Implied Growth Rate | 48.18% |
NCAV | $4.59 |
PEmg | 104.86 |
Current Ratio | 13.56 |
PB Ratio | 8.89 |
Balance Sheet - 3/31/2014
Current Assets | $14,060,000,000 |
Current Liabilities | $1,037,000,000 |
Total Debt | $191,000,000 |
Total Assets | $19,028,000,000 |
Intangible Assets | $1,682,000,000 |
Total Liabilities | $2,291,000,000 |
Outstanding Shares | 2,564,000,000 |
Earnings Per Share
2014 (estimate) | $1.01 |
2013 | $0.59 |
2012 | $0.01 |
2011 | $0.29 |
2010 | $0.28 |
2009 | $0.10 |
2008 | -$0.06 |
Earnings Per Share - ModernGraham
2014 (estimate) | $0.55 |
2013 | $0.30 |
2012 | $0.15 |
2011 | $0.18 |
2010 | $0.11 |
2009 | $0.02 |
Conclusion:
Facebook is suitable for the enterprising investor, but not for the defensive investor, because of the company's lack of dividends, short operating history, and high PEmg and price-to-book ratios.
The company appears overvalued because its earnings growth rate, based on an earnings estimate of 14 cents a share for this year, falls below the market's implied estimate of 48.18% earnings growth.
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At the time of publication, the author had no position the stock mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
