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I would like some help evaluating a security using Graham's Defensive Investing Criteria (Chapter 14 of the Intelligent Investor).

As an example security, let's look at NYSE:MEI and each of the criteria:

1.) Adequate size of the Enterprise.
Not less than 100 million in annual sales (587 Million today).

Passed: Checked the SEC 10-K filing and looks like they have 881M in Net Sales. 

2.) A Sufficiently Strong Financial Condition:
Current assest should be >= 2 x current liabilities (2:1 ratio)
Long term debt should not exceed working capital

Passed: Balance Sheet says that current assets are 427.10M and current liabilities are 104.00M. That makes the ratio 4.1. The long term debt is 2M which does not exceed working capital (current assets less current liabilities). 

3.) Earnings Stability
Some earnings for the common stock in each of the past ten years. 
(Note: I could only find 4 years worth of historical data).

Passed: Looked at Income Available to Common on the Income statement looks positive for the last 4 years.

4.) Dividend Record:
Uninterrupted payments for the last 20 years.

Failed: Looks like dividends only started paying out in 2008.

5.) Earnings Growth
Minimum increase of at least one third in per-share earnings 
in the past 10 years using three-year averages at beginning and end.
(Note: I can only view 4 years of data).

Not Sure: I do not know what to look at here. Checking the Diluted Normalized EPS on the Income Statement but I'm not sure if that is correct. The leading average of this EPS is 2.0 and the trailing average is 1.18. So 1.33 * 1.18 = 1.57. So that would mean this passed if my math is right. Help needed here.

6.) Moderate Price to Earnings
Current Price should not be more that 15 times average earnings 
of the last 3 years.

Not Sure: Again not sure where to find "earnings". If it is Diluted Normalized EPS then that leading average is 2.0 and so 2.0 * 15 = 30 and the current stock price is $30.50. If that math is correct, then this test would fail. Help needed here.

7.) Moderate Ration of Price to Assets
(Not going to analyze this at this time)
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  • 1
    #6 is just the P/E ratio - currently @ 11.64
    – Ross
    Dec 11, 2015 at 15:38
  • You're saying "earnings" in this context is just P/E ratio? So 15 * 11.64 = 174.6. That would mean this test passed because $30.50 is well below $174.60?
    – Jeff
    Dec 11, 2015 at 15:46
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    No Price to Earnings is just the P/E ratio - it is usually calculated for you over the TTM. But if you want to do it as it says in the book: Then Average Earnings Last 3 Years = (2.57 + 2.51 + 1.08) / 3 = 2.0533. $30.50 / 2.0533 = 14.8539 = Passed (at that current price).
    – Ross
    Dec 11, 2015 at 15:54
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    Correct. You could look to see how Google calculates the P/E ratio. A lot of websites all do it differently. I use http://www.morningstar.com/ mostly myself.
    – Ross
    Dec 11, 2015 at 16:35
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    Four years of historic data is not enough for this analysis. You can find older data by downloading the old anual reports of the company.
    – Zenadix
    Dec 11, 2015 at 20:14

1 Answer 1

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Everything you are doing is fine. Here are a few practical notes in performing this analysis:

Find all the primary filing information on EDGAR. For NYSE:MEI, you can use https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000065270&type=10-K&dateb=&owner=exclude&count=40 This is the original 10-K.

To evaluate earnings growth you need per share earnings for the past three years and 10,11,12 years ago. You do NOT need diluted earnings (because in the long term share dilution comes out anyway, just like "normalized" earnings). The formula is avg(Y_-1+Y_-2+Y_-3) / is avg(Y_-10+Y_-11+Y_-12)

Be careful with the pricing rules you are using, the asset one gets complicated.

I recommend NOT using the pricing rules #6 and #7 to select the stock. Instead you can use them to set a maximum price for the stock and then you can compare the current price to your maximum price.

I am also working to understand these rules and have cited Graham's rules into a checklist and worksheet to find all companies that meet his criteria. Basically my goal is to bottom feed the deals that Warren Buffett is not interested in. If you are interested to invest time into this project, please see https://docs.google.com/document/d/1vuFmoJDktMYtS64od2HUTV9I351AxvhyjAaC0N3TXrA

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  • I'm not sure I have well understood the earnings growth : is it the average of the last three years on the average of ten to twelve years from now ?
    – Revolucion for Monica
    Mar 17, 2020 at 12:42

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