SOUTHERN CALIFORNIA GAS CO

Where It Passes

Where It Falls Short

• Profitability6% pass✓ 9✗ 26▾

  15 of 16 flag SOCGM's profitability — Graham, Buffett, Lynch +12 more

  Positive EPS (10 years)0/7 years positive

  ✗GrahamPositive EPS every year for 10 years

  EPS Growth (3-yr avg, 10-yr window)

  ✗Graham>= 33% growth

  Net Income Positive (10+ years)5/7 years positive

  ✗BuffettPositive every year for 10+ years

  ROE (up to 5-year arithmetic mean)12.6%

  ✗Buffett> 15% arithmetic mean (app rule)

  Operating Margin (10-yr trend)

  ✗BuffettStable or rising over 10 years

  Free Cash Flow Proxy

  ✗BuffettPositive and growing

  Earnings Variance (10-yr CoV)

  ✗BuffettCoV < 0.3

  Retained Earnings Effectiveness

  ✗Buffett$1 retained -> > $1 market value created

  Basic earnings-growth PEG (dividends excluded)

  ✗Lynch< 1.0 (ideally < 0.5)

  3-5 Year EPS CAGR

  ✗Lynch15-30% (Fast Grower); > 0% to pass

  ROE7.4%

  ✗Lynch> 15%

  EBIT / Enterprise Value39.2%

  ✓Greenblatt> 10%

  Earnings Yield + ROC AssessmentEY=39.2%, ROC=None

  ✗GreenblattBoth EY > 10% and ROC > 25%

  Net Income / Total Assets0.00%

  ✓PiotroskiROA > 0

  ROA Change YoY3.49% -> 0.00% (delta: -3.49%)

  ✗PiotroskiCurrent ROA > Prior ROA

  (CFO / Total Assets) vs ROACFO/Assets=0.21%, ROA=0.00%

  ✓PiotroskiCFO/Assets > ROA

  Gross Margin Change YoY

  ✗PiotroskiImproved YoY

  Pre-Tax Income / Revenue10.3%

  ✓Dreman>= 8%

  Net Income / Shareholders' Equity7.4%

  ✗Dreman> 12%

  Margin of Safety

  ✗PabraiP/B < 1.5 or P/E < 15

  Return on Equity12.6% (3-yr avg)

  ✗AkreROE > 20% (3-year avg)

  Discount to Intrinsic Value

  ✗Marks>= 20% below intrinsic value

  Positive Net Income Frequency5/5 years positive

  ✓MarksPositive net income in >= 7 of last 10 years

  Operating Income / Revenue15.6%

  ✓Ackman>= 15%

  Net Income / Shareholders Equity7.4%

  ✗Ackman>= 15%

  5-Year EPS CAGR

  ✗Templeton> 0% (5-year EPS CAGR)

  Operating Margin Trend

  ✗TempletonNon-negative operating-margin trend over 3 years

  Revenue growth vs. gross and operating margin trend

  ✗SleepRevenue rising; gross margin flat or falling; operating margin holding

  Net income / market capitalization+109334.63%; #3/6340 (top 0.0%)

  ✓AsnessTop 30% of eligible cross-section✓OshaughnessyTop 10% of eligible cross-section

  Gross profit / total assets

  ✗AsnessTop 30% of eligible cross-section

  Net income / positive book equity+7.36%; #2185/5226 (top 41.8%)

  ✗AsnessTop 30% of eligible cross-section

  Negative 5-year standard deviation of ROA-0.0140; #1085/5884 (top 18.4%)

  ✓AsnessTop 30% of eligible cross-section

  3-5 Year Diluted EPS CAGR

  ✗Neff7%-20% annualized

  Positive Diluted-EPS Years

  ✗Schloss>= 70% positive over 5-10 observed years (app rule)
• Verdicts7% pass✓ 1✗ 13▾

  Split decision: 13 FAIL · 2 NEUTRAL · 1 PASS

  Overall verdict

  ✗GrahamFAIL (1/9)✗BuffettFAIL (2/9)✗LynchFAIL (0/7)•GreenblattNot ranked✓PiotroskiPASS (F-Score 4)✗DremanFAIL (3/11)✗MungerFAIL (1/4)✗PabraiFAIL (0/3)✗AkreFAIL (0/6)✗MarksFAIL (1/5)✗AckmanFAIL (2/9)✗TempletonFAIL (3/8)✗SleepFAIL (1/6)•AsnessNEUTRAL (Not ranked)✗NeffFAIL (1/6)✗SchlossFAIL (2/7)•OshaughnessyNEUTRAL (Not ranked)
• Valuation8% pass✓ 6✗ 22▾

  12 of 13 flag SOCGM's valuation — Graham, Lynch, Greenblatt +9 more

  Price / 3-yr avg EPS

  ✗Graham<= 15x

  Price-to-Book Ratio

  ✗Graham<= 1.5x

  P/E x P/B

  ✗Graham<= 22.5

  Basic earnings-growth PEG (dividends excluded)

  ✗Lynch< 1.0 (ideally < 0.5)

  EBIT / Enterprise Value39.2%

  ✓Greenblatt> 10%

  Earnings Yield + ROC AssessmentEY=39.2%, ROC=None

  ✗GreenblattBoth EY > 10% and ROC > 25%

  Price / EPS

  ✗Dreman< 12x✗Templeton< 12x (fixed ceiling; proxy for the market's cheapest 40%)

  Price / (CFO / Shares)0.0x

  ✓Dreman< 8x

  Price / Book Value per Share

  ✗Dreman< 1.2x✗Templeton< 1.5x✗SchlossP/B <= 0.80x (app cutoff)

  Valuation ReasonablenessOE Yield=0.0%

  ✗MungerP/E < 25 or Owner Earnings Yield > 5%

  P/E or FCF Yield

  ✗PabraiP/E < 15 or FCF Yield > 10%

  P/B or P/E vs. Historical Average

  ✗MarksP/E < 15 or P/B < 2.0

  Discount to Intrinsic Value

  ✗Marks>= 20% below intrinsic value

  Price / FCF per Share

  ✗Ackman<= 25

  Price vs. Trailing Low126% of trailing low ($24.52)

  ✗Templeton<= 120% of trailing low (certified split-adjusted live window)

  Net income / market capitalization+109334.63%; #3/6340 (top 0.0%)

  ✓AsnessTop 30% of eligible cross-section✓OshaughnessyTop 10% of eligible cross-section

  Positive book equity / market capitalization+14846.5762; #9/6449 (top 0.1%)

  ✓AsnessTop 30% of eligible cross-section

  Price / Diluted EPS

  ✗NeffP/E <= 15x (app proxy for a P/E 40%-60% below the market)

  (EPS CAGR % + Dividend Yield %) / P/E

  ✗Neff> 0.7 (Neff's published traditional edge)

  Price / Tangible Book Value per Share

  ✗SchlossP/TBV <= 1.00x (app cutoff)

  Book Value per Share Change

  ✗SchlossLatest BVPS >= earliest BVPS over >= 3 years (app rule)

  Revenue / market capitalization+9358.8501; #27/5247 (top 0.5%)

  ✓OshaughnessyTop 10% of eligible cross-section

  (Operating cash flow - capex) / market capitalization-8236.43%; #4472/4519 (top 99.0%)

  ✗OshaughnessyTop 10% of eligible cross-section

  Trailing six-month price return through the evaluation date+21.94%; #1265/6202 (top 20.4%)

  ✗OshaughnessyTop 10% of eligible cross-section
• Growth13% pass✓ 1✗ 12▾

  7 of 8 flag SOCGM's growth — Graham, Lynch, Dreman +4 more

  EPS Growth (3-yr avg, 10-yr window)

  ✗Graham>= 33% growth

  Basic earnings-growth PEG (dividends excluded)

  ✗Lynch< 1.0 (ideally < 0.5)

  3-5 Year EPS CAGR

  ✗Lynch15-30% (Fast Grower); > 0% to pass

  Inventory Growth vs Revenue GrowthInv: -8.6% vs Rev: -9.8%

  ✗LynchInventory growth < Revenue growth

  EPS Growth Direction

  ✗DremanPositive over recent years

  EPS CAGR

  ✗Dreman> 5% annualized

  Positive Net Income Frequency5/5 years positive

  ✓MarksPositive net income in >= 7 of last 10 years

  3yr Median Revenue Growth

  ✗Ackman>= 5%

  Positive EPS Growth Frequency

  ✗AckmanPositive EPS growth in >= 3 of last 5 years

  5-Year EPS CAGR

  ✗Templeton> 0% (5-year EPS CAGR)

  Revenue growth vs. gross and operating margin trend

  ✗SleepRevenue rising; gross margin flat or falling; operating margin holding

  5-year Revenue CAGR

  ✗SleepCAGR > 7%

  3-5 Year Diluted EPS CAGR

  ✗Neff7%-20% annualized
• Efficiency13% pass✓ 2✗ 9▾

  7 of 8 flag SOCGM's efficiency — Graham, Greenblatt, Piotroski +4 more

  Current Ratio0.62

  ✗Graham>= 2.0

  ROIC (3-5 yr avg)11.0%

  ✓Buffett> 10%

  ROIC - WACC+1.0%

  ✓BuffettPositive (WACC = 10%)

  EBIT / (NWC + Net Fixed Assets)

  ✗Greenblatt> 25%

  Current Ratio Change YoY

  ✗PiotroskiIncreased YoY

  Revenue / Total Assets Change YoY

  ✗PiotroskiImproved YoY

  Current Assets / Current Liabilities0.62

  ✗Dreman> 1.5

  Return on Invested Capital4.0%

  ✗Munger> 15%

  ROIC (high and growing)FY2005: ROIC=10.5%; FY2006: ROIC=11.4%; FY2007: ROIC=unavailable

  ✗AkreLatest 3 consecutive FYs: ROIC > 15% in each

  Reinvestment Rate x ROIC

  ✗AkreReinvestment Rate * ROIC > 10%

  ROIC (5-year)0/3 years above 12% (latest 11.4%)

  ✗SleepROIC > 12% in a majority of years
• Debt & Leverage17% pass✓ 3✗ 12▾

  10 of 12 flag SOCGM's debt & leverage — Graham, Buffett, Lynch +7 more

  Total Debt / Shareholders' Equity0.95

  ✗Dreman< 0.8✓Templeton< 1.0 (fixed cap; proxy for below-sector-median leverage)✓SchlossD/E < 1.00x

  LT Debt vs Net Current Assets

  ✗GrahamLT Debt <= Net Current Assets

  Debt/Equity & Interest CoverageD/E: 0.95, IC: 2.3x

  ✗BuffettD/E < 0.5 AND Interest Coverage > 5x

  Total Debt / Equity0.95

  ✗Lynch< 0.33

  Cash - Long-term Debt

  ✗LynchPositive preferred

  LT Debt / Total Assets Change16.18% -> 16.36%

  ✗PiotroskiDecreased YoY

  Current Assets / Current Liabilities0.62

  ✗Dreman> 1.5✗SchlossCurrent ratio >= 1.50x (app cutoff)

  Debt Levels0.95

  ✗MungerDebt/Equity < 0.5✗AkreDebt/Equity < 0.3

  Interest Coverage & Debt/EBITDAIC=2.3x, D/EBITDA=4.4x

  ✗MarksInterest Coverage > 3x; Debt/EBITDA < 4x

  Total Debt / Shareholders Equity0.95

  ✓Ackman<= 1.0

  Negative debt-to-equity (higher means less debt)-0.9537; #3166/4210 (top 75.2%)

  ✗AsnessTop 30% of eligible cross-section
• Cash Flow30% pass✓ 4✗ 8▾

  7 of 10 flag SOCGM's cash flow — Buffett, Lynch, Pabrai +4 more

  Free Cash Flow Proxy

  ✗BuffettPositive and growing

  FCF Positive and Growing$-51.0M

  ✗LynchPositive and growing

  Operating Cash Flow$14.0M

  ✓PiotroskiCFO > 0

  (CFO / Total Assets) vs ROACFO/Assets=0.21%, ROA=0.00%

  ✓PiotroskiCFO/Assets > ROA

  Price / (CFO / Shares)0.0x

  ✓Dreman< 8x

  P/E or FCF Yield

  ✗PabraiP/E < 15 or FCF Yield > 10%

  FCF Positive

  ✗MarksPositive FCF in majority of recent years

  (OCF - CapEx) / Market Cap-8236.4%

  ✗Ackman>= 4%

  Price / FCF per Share

  ✗Ackman<= 25

  Positive Operating Cash Flow frequency5/5 years positive

  ✓SleepPositive OCF in >= 70% of available years

  Operating Cash Flow - Capital Expenditures$-51.0M

  ✗Neff> $0 (app proxy for a strong fundamental case)

  (Operating cash flow - capex) / market capitalization-8236.43%; #4472/4519 (top 99.0%)

  ✗OshaughnessyTop 10% of eligible cross-section
• Valuation models50% pass✓ 1✗ 1▾

  Models split on SOCGM at $30.96 — fair values range $0.19–$115208.37

  Greenblatt fair value$115208.37

  ✓Greenblatt+100.0% margin vs $30.96

  Pabrai fair value$0.19

  ✗Pabrai-16194.7% margin vs $30.96