Would Ben Graham Even Think About Investing in Cheniere Energy (LNG)?

Cheniere Energy is currently trading at $167.44 per share and has a Graham number of $40.16, which implies that it is 317.0% above its fair value. We calculate the Graham number as follows:

√(22.5 * 5 year average earnings per share * book value per share) = √(22.5 * 6.02 * 11.905) = 40.16

The Graham number is one of seven factors that Graham enumerates in Chapter 14 of The Intelligent Investor for determining whether a stock offers a margin of safety. Rather than use the Graham number by itself, its best to consider it alongside the following fundamental metrics:

Sales Revenue Should Be No Less Than $500 million

For Cheniere Energy, average sales revenue over the last 4 years has been $17.1 Billion, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.

Current Assets Should Be at Least Twice Current Liabilities

We calculate Cheniere Energy's current ratio by dividing its total current assets of $5.61 Billion by its total current liabilities of $6.8 Billion. 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. Cheniere Energy’s current liabilities are actually greater than its current assets, since its current ratio is only 0.8.

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 Cheniere Energy’s debt ratio is -0.7, the company has much more liabilities than current assets. We calculate Cheniere Energy’s debt to net current assets ratio by dividing its total long term of debt of $24.06 Billion by its current assets minus total liabilities of $41.44 Billion.

The Stock Should Have a Positive Level of Retained Earnings Over Several Years

Cheniere Energy had negative retained earnings in 2019, 2020, and 2021 with an average of $-3336097846.1538463. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.

There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years

Shareholders of Cheniere Energy have received regular dividends since 2021. The company has returned a 1.0% dividend yield over the last 12 months.

A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years

Cheniere Energy's EPS growth rate does not meet Graham's requirement of a minimum 30% growth rate over 10 years, but the growth rate is positive nonetheless over a 7 year period. We calculate the EPS growth rate from the values reported in 2016 and 2017, which were $-2.67 and $-1.68, giving us an average of $-2.17. Then we do the same for the years 2021 and 2022, which gives us an average of $-1.81 from their reported values of $-9.25 and $5.64. The growth rate between the two averages is 16.59% — indicating a respectable upwards EPS growth trend for Cheniere Energy.

Cheniere Energy 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
  • not enough current assets to cover current liabilities
  • much more liabilities than current assets
  • negative retained earnings in 2019, 2020, and 2021
  • an acceptable record of dividends
  • some EPS growth
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.