Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 18 – A Comparison of Eight Pairs of Companies – of the Intelligent Investor written by Benjamin Graham.
1. What quote from this chapter do you think best summarizes the point Graham is making?
“Our preference for the analyst’s work would be rather that he should seek the exceptional or minority cases in which he can form a reasonably confident judgement that the price is well below value. He should be able to do this work with sufficient expertness to produce satisfactory average results over the the years.”
2. Pick two companies and do a comparison like Graham did here – i.e. look at the financials at some point in the past, and compare what happened to the companies since then. Do you find anything interesting to share with the group?
I have picked American Express (AXP) and Walmart (WMT) for a comparison at the end of January 2009. Financial numbers used for AXP as of December 31, 2008 and for WMT as of January 31, 2009.
Sources used are Morningstar.com, annual reports and Google Finance for historical price per share data.
See table below for a compilation of some key financials for AXP and WMT.
Both companies show a high return on equity for their respective last reported fiscal years, around 20%, consistent with prior years. Net margin for WMT was 3.4% compared to 9.5% for AXP.
The more interesting part here is the markets view of these companies. January 2009 was in the midst of the financial crisis. In January 2009 AXP had a price/earnings ratio of 7.1, i.e., an earnings yield of 14.1%, compared to WMT’s 15.1 and 6.6% respectively. Looking at price to book AXP was valued at 1.6 times and WMT at 2.8 times. AXP had a dividend yield of 4.3%, compared to and 1.9% for WMT.
From looking at these valuation metrics, AXP at the time seemed to offer more value than WMT. The question at the time was: How hard would AXP be hit by the on-going financial crisis? Without a more thorough analysis of AXP regarding this, it looked like the price per share in January 2009 provided a margin of safety. Looking at prior years earnings had been around 3 per share, so even if earnings per share was cut in half, the price/earnings ratio would rise to 15 times, a not to aggressive valuation.
Fast forward to fiscal year 2013 (the last reported fiscal year per July 24, 2014).
AXP showed earnings per share of 4.88 (+109% from 2008), book value per share of 18.32 (+79% from 2008), a dividend of 0.66 (-8% from 2008). Per July 24, 2014 AXP had a price/earnings ratio of 18.2 (93.15/5.11), a price/book of 4.9, a dividend yield of 1.0%.
WMT showed earnings per share of 4.88 (+56% from 2008), book value per share of 23.59 (+42% from 2008), a dividend of 1.88 (+114% from 2008). Per July 24, 2014 WMT had a price/earnings ratio of 15.7 (76.35/4.85), a price/book of 3.4, a dividend yield of 2.5%.
|
American Express |
Walmart |
| Price, January 30, 2009 |
16.63 |
47.12 |
| Number of common shares |
1,157 |
3,951 |
| Market value of common |
19,241 |
186,171 |
| Debt |
69,034 |
39,315 |
| Total capitalization at market |
88,275 |
225,486 |
| Book value per share |
10.21 |
16.64 |
| Sales |
28,365 |
405,607 |
| Net income |
2,699 |
13,400 |
| Earned per share (diluted), 2008 |
2.33 |
3.13 |
| Earned per share, 2003 |
2.33 |
1.79 |
| Earned per share, 1998 |
1.57 |
0.77 |
| Current dividend rate |
0.72 |
0.88 |
| Price/earnings |
7.1 x |
15.1 x |
| Price/book value |
1.6 x |
2.8 x |
| Dividend yield |
4.3% |
1.9% |
| Net/sales |
9.5% |
3.4% |
| Earnings/book value |
22.8% |
19.7% |
| Current assets/liabilities |
N/A |
0.8 x |
| Working capital/debt |
N/A |
Neg. |
| Growth in per-share earnings2008 versus 20032008 versus 1998 |
even+48% |
+75%+307% |
3. Pick two companies and make a prediction – i.e. look at the financials and predict where each will be in 5 years.
Predictions are always the hardest part. So as an investor one better be careful and conservative when trying to form an opinion about any future developments for different businesses.
Looking at American Express and Walmart as of 2014, we see two stable and high-quality businesses, both of which I expect to be able to grow in the coming five years. See table below for different growth derived from using the Graham fomula and saving for growth. Right now, even if no bargains, both companies seem to offer decent returns for investor.
Reconnecting to the quote in the beginning of the post, neither American Express or Walmart at current market prices seem to offer a value well below price, rather, I think, a price fairly around value. Looking at the implied growth rate based on 3y. Avg. EPS, one has to ask if Walmart’s growth rate of 3.6% is on the low side.
|
3y Avg. EPS |
|
FY2013 EPS |
|
TTM, EPS |
|
| AXP |
4,30 |
6,4% |
4,88 |
5,2% |
5,11 |
4,7% |
| WMT |
4,82 |
3,6% |
4,88 |
3,5% |
4,85 |
3,6% |
|
Price per Share, SEK |
52-week High/ Low |
Multiplier of TTM EPS |
|
|
|
| AXP |
91,93 |
96,24-71,47 |
18,0 |
|
|
|
| WMT |
75,97 |
81,37-71,51 |
15,7 |
|
|
|
4. What did you think of the chapter overall?
Great chapter and financial analysis by Graham. Always interesting with real examples and comparisons of different companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.
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