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 Celanese gives us a fair price of $124.85. In comparison, the stock’s market price is $104.76 per share. Celanese’s current market price is -16.1% below its Graham number, which implies that there is upside potential -- even for a conservative investors who require a significant margin of safety.
The Graham number is often used 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 Celanese, average sales revenue over the last few years has been $6,911,000,000.00, so according to the analysis the stock has impressive sales revenue.
Current Assets Should Be at Least Twice Current Liabilities.
We calculate Celanese's current ratio by dividing its total current assets of $3,807,000,000.00 by its total current liabilities of $2,505,000,000.00. 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. Celanese’s current assets outweigh its current liabilities by a factor of 1.5 only.
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 Celanese’s debt ratio is 2.3, the company has too much debt. We calculate Celanese’s debt to net current assets ratio by dividing its total long term of debt of $3,028,000,000.00 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years.
In Celanese’s case, the retained earnings have averaged $7,503,500,000.00 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.
A more in-depth review is necessary here, but we can tell you that Celanese has returned an average dividend yield of 207.0% over the last five years.
The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 Years.
To determine the company's Eps growth over time, we will average out its Eps for 2007, 2008, and 2009, which were $2.49, $1.72, and $3.17 respectively. This gives us an average of $2.00 for the period of 2007 to 2009. Next, we compare this value with the average Eps reported in 2019, 2020, and 2021, which were $6.84, $16.75, and $16.86, for an average of $13.00. Now we see that the company's Eps growth was 550% during this period, which satisfies Ben Graham's requirement.
Based on the above analysis, we can conclude that Celanese satisfies some of the criteria Benjamin Graham used for identifying for an undervalued stock because it is trading below its fair value and has:
- impressive sales revenue
- an average current ratio
- too much debt
- good record of retained earnings
- a solid record of dividends
- decreasing earnings per share
Remember that the above analysis is intended to ensure that investors are not overpaying for a stock — but it does not guarantee the stock's price will move upwards!
