Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is √(22.5 * earnings per share * book value per share), which for Tenet Healthcare gives us a fair price of $36.23. In comparison, the stock’s market price is $47.86 per share. Therefore, Tenet Healthcare’s market price exceeds the upper bound that a prudent investor would pay for its shares by 32.1%.
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 Tenet Healthcare, average sales revenue over the last few years has been $18,479,250,000, so according to the analysis the stock has impressive sales revenue.
Current Assets Should Be at Least Twice Current Liabilities.
We calculate Tenet Healthcare's current ratio by dividing its total current assets of $7,075,000,000 by its total current liabilities of $5,109,000,000.00. 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. Tenet Healthcare’s current assets outweigh its current liabilities by a factor of 1.4 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 Tenet Healthcare’s debt ratio is 7.9, the company has too much debt. We calculate Tenet Healthcare’s debt to net current assets ratio by dividing its total long term of debt of $15,511,000,000 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years.
In Tenet Healthcare’s case, the retained earnings have averaged $-2,011,250,000 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.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years.
Tenet Healthcare has never a regular dividend.
The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 Years.
Tenet Healthcare's earnings per share growth will be calculated using the average EPS of the years 2008, 2010, and 2011, and the average of the years 2019, 2020, and 2021. For the years starting in 2008, we have Eps values of $0.05, $8.16, and $0.48, which give us an average of $2.90. From 2019 to the present, we have EPS values of $-2.08, $3.75, and $8.42, which average out to $3.36. The growth rate between the two averages is 15.86%, which falls short of Graham's 30% requirement while remaining positive.
Tenet Healthcare does not have the profile of a defensive stock according to Benjamin Graham's criteria because in addition to trading far above its fair value, it has:
- impressive sales revenue
- an average current ratio
- too much debt
- a poor record of retained earnings
- no dividend record
- growing earnings per share