The Razor’s Edge

2-Year Price History

Ockham’s Rating

Rating Specific Information Withheld Premium Access Only

E Revenue

As a value investing shop, we are interested in seeing how E’s revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock’s current underlying value. Using this method, we have established a high range for Price to Sales of 1.18x and the low end of the range at 0.82x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for E of 0.56x is well below its normal historic Price to Sales levels. At a price of $45.90, E is 45% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

E Cash Earnings

Looking at E specifically in their Cash Earnings capabilities, Ockham views E as significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from E. For example, E’s Cash Earnings ratio per share has fluctuated between 4.25 and 6.18 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where E is with respect to prior business periods.

So with E’s current price (latest close of $45.90) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, E is 43% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn’t exist in a vacuum. So if the market doesn’t recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with E.

E Dividends

A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure on a company’s inherent expectations.

Comparable to our analysis of Sales and Cash Earnings per share, we examine dividend yields from E against the historic high and low levels over an available data range. Because E has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In E’s case, the estimated annual dividend is $4.25 producing a current dividend yield of 9.26%. The highest dividend yield from E in recent history was 12.01% while the lowest dividend yield was 2.45%. E’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 28.08% above the median which weighs very positively on our analysis of E.