# Landauer (LDR) Investment Valuation

December 14th, 2012 Posted by No Comment yet

LANDAUER (LDR) has been providing state-of-the-art technology and unparalleled customer service within the radiation safety industry to better understand and document information related to occupational, environmental and healthcare-related exposure to ionizing radiation since 1954.

## Value Investing Approach on LDR

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.

## LDR Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise  Value (EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.  The formula is given below:

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

#### Explanation

The average market capitalization for Landauer Inc was \$557 and moving up and down at a rate of 5 percent average. The total debt was 5 percent and the cash and cash equivalent was a 4 percent average. The enterprise value was greater by 1 percent against the market value. Purchasing the entire business of LDR would be paying 99 percent of its equity and 1 percent total debt

The costs of buying the entire business of Landauer Inc to date, November 9, 2012, would be \$630 at \$70 per share.   While the market price to date was at \$56.19 per share.

### Net Current Asset Value (NCAV) Method

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

The net current asset value approach shows that the stock of LDR was trading at an overvalued price from 2007 to ttm6 2012 because 66 percent of NCAVPS was lesser than the market value.  The 66 percent ratio was only 0.3 percent of the market value.

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

Calculating the market capitalization over the net current asset value of the company, we will know if the stock is trading over or undervalued. The result should be less than 1.2 ratios for Graham to buy stocks.

The MC/NCAV valuation shows that the price was overvalued in 2007 to ttm6 2012 because the ratio exceeded the 1.2 ratios. This means that LDR’s stock did not pass the test because the price was expensive.

### The margin of Safety (MOS)

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety.

Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

#### Explanation

There was a zero margin of safety for 2007 to ttm6 2012.  The intrinsic value was 72 percent of the enterprise value.

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

#### Explanation

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

The earnings per share (EPS) and the sustainable growth rate (SGR) factor intrinsic value.

#### Sustainable Growth Rate (SGR)

Sustainable growth rate (SGR) shows how fast a company can grow 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. Please refer to the formula included in the table below:

#### Explanation

The sustainable growth rate was 4.60 percent average, while the return on equity was 31.99 percent average and the payout ratio was 86 on average. Landauer Inc is paying cash dividends to its common shareholders yearly from 2007 to ttm6 2012.

There are two approaches to calculating the sustainable growth rate. We need those to better understand the next topic. So what are those? The first one is by using the relative ratio and the other one is by using the average return on equity. The results of these approaches for LDR were summarized below.

There was a zero margin of safety for LDR since 2007 to ttm6 2012. The space in between these two lines represents the margin of safety since the EV line was higher than the IV line, this means a zero margin of safety.

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

This method will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

#### Explanation

P/E*EPS valuation for shows that Landauer Inc’s stock traded at an overvalued price. The reason behind is that enterprise value was greater than the P/E*EPS ratio. While in 2007 and 2009 the price was fair valued therefore undervalued. The enterprise value was 5 percent over the P/E*EPS ratio.

It indicates that the stock of Landauer Inc was expensive. The two approaches for calculating P/E*EPS is by using the relative price to earnings and the average price to earnings. And if you will look at the summary table below, you will see that both approaches results were almost the same.

### Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)

This method will determine whether the stocks are undervalued or overvalued. By multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS). Then comparing it to the enterprise value per share, we can determine the status of the stock price.

The EV/EPS valuation for LDR indicates that the price (P/E) was 41 percent and the earnings (EPS) was 59 percent.  The discretion would depend on the analyst.

### 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.

#### Explanation

The EV/EBITDA valuation tells us that it will take 13 years to cover the costs of buying the entire business of LDR.  In other words, it will take 13 times of the cash earnings of LDR to cover the costs of buying the entire LDR. Thirteen years is a very long period of waiting.

For additional bits of information, EV/EBITDA valuation is also a gauge for the profitability of the company. Digging into the finances of LDR, the company had an average of 22 percent net earnings.

In conclusion,

The average market capitalization for LDR was \$557 and it is moving up and downs at a rate of 5 percent average. The total debt was 5 percent, while the cash and cash equivalent were a 4 percent average. The enterprise value was greater by one percent against the market value. Buying the entire business would be paying 99 percent of its equity and one percent of its debt.

The cost of buying the entire LDR to date, November 9, 2012, would be \$630 at \$70 per share. The market price to date was \$56.19 per share.

#### Net Current Asset Value

The stock was trading at an overvalued price because the market value was greater than the 66 percent of NCAVPS. While the MC/NCAV method indicates that the price was overvalued since 2007 to ttm6 2012. Because the ratio exceeded 1.2, therefore it indicates that the price was expensive.

Furthermore, the margin of safety for LDR shows a zero percent while intrinsic value was \$45 average.  On the other hand, the SGR was 5. While the annual growth rate was 18 and the return on equity was 32 percent.

#### Relative Valuation

Moreover, the price was undervalued because the enterprise value was lesser than the P/E*EPS ratio. With EV/EPS,  the price (P/E) was 41 percent while the earnings (EPS) was a 59 percent average.

In addition, it will take 13 years to cover the costs of buying the entire business of LDR.

Since there was a zero margin of safety for LDR, therefore stock was trading at an overvalued price. EV/EBITDA not favorable, therefore a HOLD position is recommended on the stock of Landauer Inc.

Research and Written by Cris