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). (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
|Value Based on 3% Growth||$8.02|
|Value Based on 0% Growth||$4.70|
|Market Implied Growth Rate||48.18%|
Balance Sheet - 3/31/2014
Earnings Per Share
Earnings Per Share - ModernGraham
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.
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.