Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is the square root of (22.5 x earnings per share x book value per share), which for Danaher gives us a fair price of $112.72, compared to the stock’s market price of $251.8. Therefore, Danaher’s market price exceeds the upper bound that a prudent investor would pay for its shares by 123.4%.
Many investor resources mention the Graham number in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor. The analysis also touches on the following points:
Sales revenue should be no less than $100 million.
For Danaher, average sales revenue over the last few years has been $21,674,250,000.00, so according to the analysis the stock has impressive sales revenue.
Current assets should be at least twice current liabilities.
Danaher’s current assets outweigh its current liabilities by a factor of 1.4 only. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year.
The company’s long-term debt should not exceed its net current assets
This means that its ratio of debt to net current assets should be 1 or less. Since Danaher’s debt ratio is 6.32, the company has too much debt. We calculate net current assets as current assets minus current liabilities.
The stock should have a positive level of retained earnings over several years.
In Danaher’s case, the retained earnings have averaged $27,328,750,000 over the last 4 years. Retained earnings refer to the net income left for equity investors after all expenses have been accounted for, including dividends. It's a similar metric to free cash flow, with the difference being that earnings are calculated on an accrual, as opposed to a cash basis. In other words, earnings don't represent actual cash -- only evidence that the company can or will receive income based on its sales.
There should be a record of uninterrupted dividend payments over the last 20 years.
Danaher has offered a dividend at least since 1995, and in the last five years, it has returned an average dividend yield of 0.43%.
The company should have a minimum increase of at least one-third in Eps over the past 10 years.
To calculate the 10-year Eps growth rate of Danaher, we will start by finding the averages of the three-year bookends for the 10-year period, then calculate the growth rate of the two bookend averages.
- 2010 Eps: $3.11
- 2011 Eps: $3.34
- 2012 Eps: $3.24
- Bookend 1 average Eps: $3.23
- 2020 Eps: $8.63
- 2021 Eps: $8.48
- 2022 Eps: $9.04
- Bookend 2 average Eps: $8.72
- 10 year Eps Growth rate: 170%
Danaher easily clears the 30% threshold for 10-year Eps growth recommended by Graham. In addition, when we compare the company’s current Eps rate versus its projected one, which for Danaher gives us a projected short term Eps growth rate of 1.15%.
Based on the above analysis, we can conclude that Danaher would probably not have been on Ben Graham's short list. Its liabilities and current share price are too high -- although it does have a solid growth and dividend record. For more stock analysis like this one, make sure to subscribing to our free newsletter today!