Saturday, November 21, 2015

ING Groep intrinsic value based on Benjamin Graham Defensive stock selection


ING is in the Financial sector, which is one sector that this methodology avoids. Technology and financial stocks are considered too risky to invest in. Several of Graham's criteria, like the Current Ratio and Debt to Current Assets, do not apply to financial companies. As a result, the company will not be able to pass this methodology, although we will include the remainder of the analysis for informational purposes.

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. ING's sales of €15,296 million, based on 2014 sales, pass this test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] Long term debt must not exceed net current assets. Companies that meet this criterion display one of the attributes of a financially secure organization. ING is a financial stock so this variable is not applicable and this criterion cannot be evaluated.

LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for ING were negative within the last 5 years and therefore the company fails this criterion. The earnings per share this year are also 50% lower than 10 years ago.

EARNINGS YIELD:  [PASS]  The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. ING's E/P of 1,1% using earning per share estimate of €1,1.

Graham Number value: [PASS]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. ING has a Graham number of (22,5 x €1,1 EPS x €13,10 Book Value) = €15,6

The graph below shows the analysis done in 2013 with an estimated profit of 1,1 per share which turned out to be lower in 2013 and 2014.  Buying at €9 in 2013 and selling now above 13 would result in a return of 20% per year.  

2013 analysis 
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