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). (MG refers to "modern Graham.")

FB Chart

FB data by YCharts

Defensive Investor - must pass at least six of the following seven tests: Score = 2/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - ratio of current assets over current liabilities  greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. 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
  6. 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.)
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least five years - PASS
  4. Dividend Record - currently pays a dividend - FAIL
  5. 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.

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