Palo Alto Networks is currently trading at $196.27 per share and has a Graham number of $26.13, which implies that it is 651.1% 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 * 0.4 * 10.858) = 26.13
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 Palo Alto Networks, average sales revenue over the last 5 years has been $6.92 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 Palo Alto Networks's current ratio by dividing its total current assets of $6.24 Billion by its total current liabilities of $7.4 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. Palo Alto Networks’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. Palo Alto Networks has much more liabilities than current assets because its long term debt to net current asset ratio is -0.1. We calculate Palo Alto Networks’s debt to net current assets ratio by dividing its total long term of debt of $963.9 Million by its current assets minus total liabilities of $14.46 Billion.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years
Palo Alto Networks had good record of retained earnings with an average of $-672964307.6923077. 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
We have no record of Palo Alto Networks offering a regular dividend within the last twenty years.
A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years
To determine Palo Alto Networks's EPS growth over time, we will average out its EPS for 2011, 2012, and 2013, which were $0.00, $-0.05, and $-0.22 respectively. This gives us an average of $-0.09 for the period of 2011 to 2013. Next, we compare this value with the average EPS reported in 2022, 2023, and 2024, which were $-0.90, $1.28, and $7.28, for an average of $2.55. Now we see that Palo Alto Networks's EPS growth was 2933.33% during this period, which satisfies Ben Graham's requirement.
Based on the above analysis, we can conclude that Palo Alto Networks does not have the profile of a defensive stock according to Benjamin Graham's criteria because it is trading above its fair value and has:
- impressive sales revenue
- not enough current assets to cover current liabilities because its current ratio is 0.84
- much more liabilities than current assets because its long term debt to net current asset ratio is -0.1
- good record of retained earnings
- no dividend record from EDGAR
- exceptional EPS growth
