Navigant Consulting Inc (NCI) is a specialized, global professional services firm. Our teams apply experience, foresight, and industry expertise to pinpoint emerging opportunities to help build, manage, and protect the business value of the clients we serve. Headquartered in Chicago, IL. NCI was founded in 1983.
Value Investing Approach for NCI
The basis for this valuation is the company’s five years of historical financial records; the balance sheet, income statement, and cash flow statement. Enterprise value is the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company’s debt but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm’s value. The value of a firm’s debt, for example, would need to be paid by the buyer when taking over a company. Thus Enterprise Value provides a much more accurate takeover valuation because it includes debt in its value calculation.
The Investment in Enterprise Value
The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise value (EV) represents the total value of the entire company. On the other hand, market capitalization (MC) represents the entire value of the company in the stock exchange. It represents the price of the equity.
Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)
The enterprise value was trending down at 7, -9, -26, 10 and 6 percent with an average of -3 percent from 2008 to 2011 and the trailing twelve months (TTM). Market capital went down as well by 16, -6, -36, 30 and 1 percent with an average of 1% percent from 2008 to 2012 trailing twelve months. The total cash of the company represented 2 percent of the enterprise value while total debt represents 25 percent. In the trailing twelve months, the cash was 0%, while total debts represent 22 percent of the enterprise value. Buying the entire company is paying for the equity and total debt, and the distribution would be as follows:
|Average||Operating Assets = 100%||Equity: 77% + Total debt (net of cash) 23%|
|TTM||Operating assets = 100%||Equity: 78.3% + Total debt (net of cash) 21.7%|
Benjamin Graham’s Stock Test
Net Current Asset Value Per Share (NCAVPS)
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 NCAV. This method is one of the oldest documented stock selection methodologies, dating back in the 1930s.
Net Current Asset Value = Current Assets – Current Liabilities
NCAVPS = NCAV / # of shares outstanding
The table shows that the calculated 66 percent of NCAVPS was lesser than the market value per share, this means that the price was trading at an overvalued price from 2007 to 2012 trailing twelve months. The market price was 90 percent average over the calculated 66 percent of the NCAVPS meaning it was expensive and the stock was trading above the liquidation value of the company.
Graham would consider buying if the share price does not exceed the result of 66 percent. The reason for this according to Graham is when a stock is trading below the NCAVPS, they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in the bargain, and it is worth buying.
Market Value/Net Current Asset Value (MV/NCAV)
Another stock test by Graham is by calculating the enterprise value over the net current asset value. The result must not be greater than 1.2 ratios. Graham would only consider buying if it does not exceed 1.2 ratios.
The results of the calculation showed that the ratio was above 1.2, so, it indicates that the price was overvalued from 2007 to 2012, trailing twelve months. It means that the price was expensive.
Benjamin Graham’s Margin of Safety
The margin of safety (MOS) is a formula to identify the difference between company value and price. If value and the price are equal, the stock price is considered fairly valued. If the price is more than the value, then you can assume that the stock is overpriced. However, if the price is less than value, this is a good buy because there is lots of room available for better profit in the future.
The margin of Safety (MOS)
The table showed that the margin of safety for 2007, 2009 and 2010 was zero, meaning the enterprise value is lesser than the price. Further, indicates that the price during these periods was expensive. While in 2008, 2011 and the trailing twelve months, the true value was greater than the price. Meaning the stock is trading at an undervalued price. The margin of safety represents a 14 percent average.
Here is the explanation for the calculation: 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 as proposed by Graham (Graham proposed an 8.5, but we changed it to 9) 2: the average yield of high-grade corporate bonds.
I use the return on equity for the sustainable growth rate as the major factor. We need to know the dividend payout ratio to calculate the sustainable growth rate.
The above table showed that there was no payout ratio from 2007 to 2012 trailing twelve months. It indicates that the company is not paying dividends since 2007. It is advisable that one should look into the free cash flow of the company as to where the money is going.
So, let us walk further, and I will guide you to the intrinsic value graph of NCI.
Intrinsic Value Graph
The graph shows two comparisons, between the intrinsic value or the true value of the stocks, the market price and the enterprise value per share. As we can see above, in 2007, 2008 and 2010 the intrinsic value (red line) was below the price for both market and enterprise (blue and green line). This means that the price was higher than the true value; therefore, the stock is trading at an overvalued price. On the other hand, in 2008, 2011 and 2012 trailing twelve months, the intrinsic value is higher than the price. Meaning the stock is trading at a price below the real value of the stock. Therefore, the price was cheap.
Margin of Safety
The margin of safety in percent was 22, 31 and 31, respectively, using the enterprise value. While using the market value, the margin of safety for the trailing months is 47%. The trading price in 2011 and 2012 was cheap by 31 percent.
NCI Relative Valuation Method
Price to Earnings*Earning Per Share (P/E*EPS)
This valuation will determine whether the stocks are undervalued or overvalued by multiplying the P/E ratio with the company’s relative EPS and comparing it to the EV price per share.
The result of the calculations indicates that the enterprise value price was overvalued from 2007 to 2012. Because the price was higher than the results. So, therefore, using this valuation, it would not be advisable to invest.
Enterprise Value/Earning Per Share (EV/EPS)
Another use of this ratio is by dividing the enterprise value by its projected earnings per share (EPS). By dividing the enterprise value to EPS, the result represents the price (P/E) and the difference represents the earnings (EPS). This separates the price to earnings ratio to earning per share. This metrics, EV Price to EPS separate price and earnings per share.
The enterprise value per share was separated to price (P/E) and earnings (EPS). The above calculation indicated that the price was more than the enterprise value per share. Because it factors net income and the number of shares. If the net income is lesser than the number of shares, the result of EPS is very low. Thereby, giving us a higher value of price (the separated amount) than the enterprise value (the amount to be separated). In addition, the earnings resulted in negative earnings, as we can see in the table above. This might indicate that the company is not profitable. In 2011 and the trailing twelve months, the earnings of the company show improvement by 75 percent and 15 percent, respectively.
In using this valuation, we will know whether the stock is trading over or undervalued. Converting it into a percentage, the price is 158 percent and the earnings are -58 percent. While the result of 100 percent is the enterprise value.
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. It is useful for analyzing and comparing profitability between companies and industries.
EBITDA = Net Income + Interest Expense + Tax + Depreciation + Amortization
Buying the entire business would take 10 years to cover up the costs of buying. In other words, it would take 10 times the earnings of the company to recover the cost of the purchase. Including debtor an average of 12 years to cover the costs. It is a very long period of waiting. This means that the company is not profitable because the cash generating power of the entire firm is low. EBITDA is net income with interest, taxes, depreciation, and amortization.
The price to date was $11.37 with $586.6 market capitalization. An overall view, the stock of NCI was trading at an overvalued price. I recommend that the stock of NCI be Hold.
Research and Written by Cris