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 * 5 year average earnings per share * book value per share), which for Carrier Global gives us a fair price of $29.41. In comparison, the stock’s market price is $54.89 per share. Therefore, Carrier Global’s market price exceeds the upper bound that a prudent investor would pay for its shares by 86.6%.
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 requires us to look at the following fundamentals of Carrier Global:
Sales Revenue Should Be No Less Than $500 million
For Carrier Global, average sales revenue over the last 3 years has been $19.5 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 Carrier Global's current ratio by dividing its total current assets of $9.88 Billion by its total current liabilities of $6.03 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. Carrier Global’s current assets outweigh its current liabilities by a factor of 1.6 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 Carrier Global’s debt ratio is -1.1, the company has much more liabilities than current assets. We calculate Carrier Global’s debt to net current assets ratio by dividing its total long term of debt of $8.7 Billion by its current assets minus total liabilities of $18.01 Billion.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years
Carrier Global had positive retained earnings from 2019 to 2022 with an average of $2.59 Billion. 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 Carrier Global have received regular dividends since 2020. The company has returned a 1.3% 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
During the 5 years for which we have data, Carrier Global's earnings per share grew at a rate of 29.75% — which doesn't meet Graham's requirements for duration or magnitude of growth. Nonetheless, the increase of $3.16 EPS in 2018 to a reported $4.10 EPS in 2022 is respectable by most standards.
It may be trading far above its fair value, but Carrier Global actually satisfies some of the criteria Benjamin Graham used for identifying for an undervalued stock because it has:
- impressive sales revenue
- a decent current ratio
- much more liabilities than current assets
- positive retained earnings from 2019 to 2022
- an acceptable record of dividends
- some EPS growth
