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 Albertsons Companies gives us a fair price of $23.09, compared to the stock’s market price of $20.91. Albertsons Companies’ current market price is -9.5% below its Graham number, which implies that there is upside potential -- even for conservative investors who require a significant margin of safety.
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 Albertsons Companies, average sales revenue over the last few years has been $66,141,750,000.00, so according to the analysis the stock has impressive sales revenue.
Current Assets Should Be at Least Twice Current Liabilities.
We calculate Albertsons Companies's current ratio by dividing its total current assets of $8,366,400,000.00 by its total current liabilities of $8,348,500,000.00. 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. Albertsons Companies’ current liabilities are equal to its current assets, since its current ratio is only 1.0.
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 Albertsons Companies’s debt ratio is 370.7, the company has too much debt. We calculate Albertsons Companies’s debt to net current assets ratio by dividing its total long term of debt of $6,634,900,000.00 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years.
In Albertsons Companies’s case, the retained earnings have averaged $997,100,000.00 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.
Albertsons Companies has returned a 2.31% dividend yield over the last 12 months.
The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 Years.
The company has only been public since 2019, and in that time, its EPs has increased from $0.59 to $2.83 — a very healthy increase. We can complement this historical growth with a comparison of the company’s current Eps rate versus its projected one, which for Albertsons Companies gives us a projected short term Eps growth rate of 1.0%.
Based on the above analysis, we can conclude that Albertsons Companies does not have the profile of a defensive stock according to Benjamin Graham's framework even though it is trading below its fair value, has impressive sales revenue and a good record of retained earnings. Unfortunately, these factors are probably outweighed by:
- a worrying current ratio
- too much debt
- lacking dividend record
- insufficient years of consistent earnings per share growth