Benjamin Graham is the father of value investing who, through his teachings, created an investment philosophy that has lasted over 75 years. He wrote two of the greatest investment books ever written, "The Intelligent Investor" and "Security Analyst." Some of the greatest and most profitable investment managers are students of Graham and his airs like Warren Buffett (Trades, Portfolio). Value Investing has changed from what Graham originally created, having evolving into a investment philosophy that values a business on far more than its assets. Today some investors seek out classic Graham Net Asset Stocks and other seek-out franchise companies like Coca-Cola (KO, Financial) selling for less than estimated business value. The value investing philosophy is simple your not buying a piece of paper your buy a stake in a business. This changes the way think when you making investments causing to ask how much I'm I will to pay for a percentage of this company's earnings, cash flow, etc.
Graham Number
Graham was a math genius who liked to keep any investment formula simple by using simple arithmetic. One of his investment formulas he created is simple to use and understand its combined assets and earnings creating a rough estimate on what a company worth based on earnings and assets. The Graham Number is as rough estimated of value based on earnings and assets.
This formula isn't widely used or discussed since the bulk of the focus goes to a formula that Graham had in "The Intelligent Investor," which he made clear in the footnotes that it shouldn't be used. The Graham Number should be used in parallel with other valuation methods.
Companies that are selling for less than Graham Number
Here are a few companies that sells for less than there Graham Number value, POSCO (PKX, Financial), Alliance Resources Partners LP (ARLP, Financial) and Brookfield Property Partners (BPY, Financial) are all selling for at least 20% discounts to their Graham Number values. These companies are financial sound and selling at reasonable valuations and less than book value as well.
POSCO
PKX data by GuruFocus.com
POSCO shares have been falling since 2010, with the company ADR shares sells for $46.37/share and has a tangible book value of $90/share. The company had $2.63/share in earnings in 2014. POSCO is a multinational steelmaker that has the ability to produce 39.1 million tons of raw steel a year. The company is the fourth-largest steelmaker in the world. POSCO shares trade for $46/share and have a Graham Number of $73/share. The company is selling for 0.5x tangible book value and is selling at over 20% discount to its Graham Number Value.
POSCO Graham Number:
square root 22.5 x 2.63 x $90 = $73/share
Alliance Resources Partners LP
ARLP data by GuruFocus.com
The company is a diversified producer and marketer of steam coal to major US utilities and industrial companies. Alliance Resources Partners LP is one of the few profitable coal companies today with the company have 15-year average earnings of $4.65/share. It is a solid free cash flow producer, producing an 15-year average free cash flow of $6.38/share. Benjamin Graham like to use 10 years or more average of earnings to see if the company was undervalued based on its average earnings over the business cycle. The company has current earnings of $4.86/share and a book value of $13/share. When you do the Graham Number, you get $38.66/share. Currently the company is selling for 5.5x its 15-year average earnings and 5x its current earnings. Alliance is profitable an should sell for 10x both its 15-year average earnings and its current earnings. At 10x its average and current earnings the company stock would sell for $46.50 to 48.50/share. Currently Alliance is selling for at least a 20% discount from its Graham Number value.
Graham Number:
square root 22.5 x $4.86 x$13.70 = $38.66/share
Brookfield Property Partners LP
BPY data by GuruFocus.com
Brookfield Property Partners LP is a global commercial property company that owns and invests in only first-class commercial and residential properties. The company is currently selling for 4x its earnings and 0.90x its book value. Brookfield Property has earning of $4.66/share in 2014 and a book value of $26.88/share. The company has a Graham Number of $53.06/share. Brookfield is selling at a large discount to its Graham Number and less than 10x its earnings. The company should sell for at least 10x its earning and at 10x its earnings would sell for $46.60/share.
Graham Number:
square root 22.5 x $4.66 x $26.88 = $53.08/share.
Enclosed
The Graham Number is another tool in a value investors tool box to use with other valuation methods. The number combines earnings and assets to estimated businesses fair value. All three companies are selling at low valuations and are profitable as well. These companies are all up for grabs were any investors can take advantage of Mr. Market's behavior and invest in these companies at low valuations.
