Navios Maritime Holdings Inc (NM) Investment Valuation.

**Navios Maritime Value Investing Approach **

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

**Novios Maritime Investment in Enterprise Value **

The concept of enterprise value is to calculate what it would cost to purchase an entire business.

The market capitalization of Navios Maritime Holdings Inc was erratic in the movement from 2007 with an average trend of 33 percent. The total debt was 85 percent of the enterprise value, while its cash and cash equivalent were only 11 percent average. The market capitalization was only 26 percent of the enterprise value because of its debt. Let say you are the investor, buying the entire business of Navios Maritime would make you pay for 74 percent of its total debt and 26 percent of equity.

The buying price of the entire business of Navios Maritime to date, April 6, 2013, will be $1.7 billion at $15.55 per share. The market price to date was $4.34 per share. Navios Maritime was 74 percent leverage against enterprise value.

**Net Current Asset Value (NCAV) method**

Net Current Asset Value (NCAV) method is well known in the value investing community. Studies have all shown that NCAV method of selecting stocks has outperformed the market significantly. The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.

The net current asset value approach on Navios Maritime Holdings Inc, tells us that the stock price was trading at an overvalued price from the period 2007 because the 66 percent ratio was only 4 percent of the market price.

It shows that the stock price was expensive because the stock traded above the liquidation value of Navios Maritime.

**Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation **

By calculating market capitalization over the net current asset value of the company, we can determine whether the stock is trading over or undervalued. The result should be less than 1.2 ratios.

*Market Capitalization / NCAV = Result (must be lesser than 1.2)*

The MC/NCAV method shows that the stock was overvalued from the period 2008 to 2012 because the ratio exceeded the 1.2 ratios.

** Navios Maritime Margin of Safety (MOS) **

The basic meaning of “Margin of Safety” is that investors should only purchase security when it is available at a discount to its underlying intrinsic value or what the business would be worth if it were sold today.

The margin of safety was computed as Margin of Safety = Enterprise Value – Intrinsic Value.

The margin of safety for Navios Maritime was 34 percent average. There was zero margin of safety for 2009, 2011 and 2012. The margin of safety has not reached the requirement of Benjamin Graham of 40 percent below the intrinsic value; therefore, the stock is not a candidate for buying.

#### Intrinsic Value

*Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate) *

The explanation in the calculation of intrinsic value was as follows:

- EPS: the company’s last 12-month earnings per share;
- G: the company’s long- term (five years) sustainable growth estimate;
- 9: the constant represents the appropriate P-E ratio for a no-growth company and
- 2: the average yield of high-grade corporate bonds.

#### Earnings per Share

Earnings per share and the growth factor the calculation for intrinsic value. The earnings per share were average $1.05, while the annual growth was 34 percent. On the other hand, the average intrinsic value was $60.52.

The formula for the earning per share.

#### The Sustainable Growth Rate

Sustainable growth rate (SGR) shows how fast a company can grow by using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

Sustainable-growth rate = ROE x (1 – dividend-payout ratio)

#### Explanation

The result of the calculation for sustainable growth rate shows that the average SGR was 12.45 percent. The return on equity was 16 percent average and the payout ratio was 42 percent average.

Return on Equity (ROE) is an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. This shows how many dollars of earnings result from each dollar of equity.

Return on Equity formula is:

#### The Relative and Average Approach

Now, there are two ways of computing the sustainable growth rate, the relative approach, and the average approach. I have used the relative approach in the computations above.

The average approach produces a higher margin of safety than by using the relative approach.

#### Explanation

If you observe on the graph above, there are two lines. these two lines are the intrinsic value line which is the true value of the stock and the price. During 2007, the true value of the stock was high above the market price. Then on 2008, the true value dropped down at a rate of 88 percent and going forward, the value remains at a low level. There was zero margin of safety during 2009, 2011 and 2012 because the true value line was below the price line. The margin of safety is the difference between the two lines, in other words, the space in between is the margin of safety. If we calculate the difference, the margin of safety was 34 percent average.

**Navious Maritime Relative Valuation Methods **

The relative valuation methods for valuing a stock is to compare market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

**Price to Earnings/Earning Per Share (P/E*EPS) **

This valuation will determine whether the stock is undervalued or overvalued. By multiplying the Price to Earnings (P/E) ratio with Earning per Share (EPS) and then compare it to the enterprise value per share.

The P/E*EPS valuation, tells us that the stock price was trading at the overvalued price from 2008 to 2012 because the P/E*EPS ratio was lesser than the enterprise value per share. The ratio represents only 37 percent of the price; therefore, the stock price was expensive.

The average approach produces a higher result because it takes into consideration the prior periods performance.

**The Enterprise value (EV)/Earning Per Share (EPS) or (EV/EPS) **

The use of this ratio is to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result will then represent the price (P/E) and the difference represent the earnings (EPS).

The EV/EPS valuation tells us that the price (P/E) that was separated from the enterprise value was 28 percent average. While the earnings (EPS) was 72 percent average. This indicates that the stock price was undervalued because the price was only one-fourth over to the market price.

**Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)**

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries. It gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

The EV/EBITDA tells us that it will take 7 years to cover the costs of buying the entire business of Navios Maritime. In other words, it will take 7 times of the cash earnings of the company to cover the cost of buying the entire business.

The EBITDA was only 16 percent of the enterprise value. It indicates that the company is not very efficient in generating cash for its daily business operation.

**In conclusion, **

The market capitalization was erratic in the movement from 2007 with an average trend of 33 percent. The total debt was 85 percent of the enterprise value, while its cash and cash equivalent were only 11 percent average. The market capitalization was only 26 percent of the enterprise value because of its debt. Buying the entire business an investor would be paying 74 percent of total debt and 26 percent of equity.

The buying price of the entire business to date, April 6, 2013, will be $1.7 billion at $15.55 per share. The market price to date was $4.34 per share. NM was 74 percent leverage against enterprise value.

#### Net Current Asset Value

The net current asset value approach shows that the stock price was overvalued and was trading above the liquidation value. Therefore it means that it did not pass the stock test. The MC/NCAV approach shows that the ratio exceeded the 1.2 ratios, therefore the price was expensive.

#### Margin of Safety

In addition, the margin of safety was only 34 percent average; therefore, the stock is not a good candidate for buying. The sustainable growth rate was 12 percent and the annual growth rate was 34 percent. The company’s return on equity was 16 percent and the earning per share was $1.05 average.

#### P/E*EPS

The P/E*EPS valuation shows that the stock price of Navios Maritime was overvalued. The EV/EPS indicate that the price (P/E) was 175 percent and the earnings per share (EPS) is -75 percent. This might indicate that the stock price was expensive.

#### EV/EBITDA

The EV/EBITDA tells us that it will take 7 years to cover the cost of buying the entire business. Therefore, I recommend a **HOLD** in the stock of Navios Maritime Holding Inc.

*A note to the reader: This recommendation is good only to date, April 6, 2013, and until there are changes in the market price that affect the calculations above. If you are interested to know the current situation of the company on the date of your reading, you can comment and ask us for an update. We are pleased to serve you. Thank you.- Cris 4.06.2013*

Research and Written by Cris

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