How Can We Analyze Insulet (PODD) Like Ben Graham?

Insulet does not have the profile of a defensive investment based on the requirements of Ben Graham. The Medical Instruments & Supplies firm may nonetheless be of interest to more risk-oriented investors who have a solid thesis on the company's future growth. At Market Inference, we remain agnostic as to such further developments, and prefer to use a company's past track record as the bellwether for future potential gains.

Insulet Is Probably Overvalued

Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:

√(22.5 * 6 year average earnings per share (0.03) * 6 year average book value per share (7.935) = $3.28

At today's price of $174.67 per share, Insulet is now trading 5225.3% above the maximum price that Graham would have wanted to pay for the stock.

Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.

Impressive Growth, but Inconsistent Profitability and no Dividend

Insulet’s average sales revenue over the last 6 years has been $1.03 Billion, so by Graham’s standards the company is large enough to warrant an investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today. Needless to say, this is the least important of Graham's requirements, and may be overlooked by all but the most conservative investors.

More importantly, Ben Graham believed that a margin of safety could be obtained by investing in companies with consistently positive retained earnings. Insulet had negative retained earnings in 2019, 2020, and 2021 with an average of $-592761615.3846154 over this period. So the company is not accumulating enough cash over time by Graham's standards.

Graham also required a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.There are only 7 years of EPS data available on Insulet, which is short of the required 10, but it's still worthwhile to consider its EPS trend over the available period. First, we will average out its EPS for 2016 and 2017 which were $-0.48 and $-0.46 respectively. This gives us an average of $-0.47 for the period of 2016 to 2017. Next, we compare this value with the average EPS reported in 2021 and 2022, which were $0.24 and $0.07, for an average of $0.16. Now we see that Insulet's EPS growth was 134.04% during this period, which satisfies Ben Graham's requirement for growth.

We have no record of Insulet offering a regular dividend.

Insulet’s Balance Sheet Meets Graham’s Criteria

It was also essential to Graham that the company’s current assets outweigh its current liabilities, and that its long term debt be inferior to the sum of its net current assets (current assets minus total liabilities). This is the aspect of the analysis that most companies fail, yet Insulet passes comfortably, with an average current ratio of 3.6, and average debt to net current asset ratio of -3.0.

Conclusion

According to Graham's analysis, Insulet is likely a company of average quality, which does not offer a significant enough margin of safety for a risk averse investor.