Stocks Value Investing Weekly

10 Companies in the Spotlight This Week – 11/30/2013

We looked at 10 different companies this week, including finishing our review of the Dow Jones Industrial Average.  Here’s a summary of the ModernGraham Valuations.  For more detailed analysis, click on the name of the company.  To see screens of all of our valuations, be sure to get a copy of this month’s edition of ModernGraham Stocks and Screens!

The Elite (Defensive or Enterprising and Undervalued)

  • Dover Corporation (DOV) – Dover Corporation is an intriguing company for Enterprising Investors.  The company’s current ratio is too low and the PB ratio too high for Defensive Investors, but the company passes enough of the requirements for Enterprising Investors to qualify to be on their radar.  From a valuation perspective, the company has significantly grown its earnings in the historical period under review, taking EPSmg (normalized earnings) from $3.08 in 2008 to an estimated $4.71 for 2013.  The market is implying a growth rate of 5.51%, which is lower than what has been achieved.  As a result, Enterprising Investors should be very keen to do further research on Dover to determine whether it would be suitable for their individual portfolio, while keeping in mind the 7 Key Tips to Value Investing.
  • Gap Incorporated (GPS) – Gap Inc. is a very attractive company for both Defensive Investors and Enterprising Investors.  The company has very strong financials, having passed all of the requirements for either investor type, with the exception of the price to book ratio requirement of the Defensive Investor.  From a valuation perspective, Gap has grown its EPSmg (normalized earnings) from $1.17 in 2009 to an estimated $2.17 for 2014, and has done so through consistent annual growth.  As a result, the ModernGraham valuation model looks very favorably on the company, and it appears to be undervalued with respect to the market’s implied growth rate of 5.18%.  Potential investors should feel comfortable doing further research on this company (though, as always you should speak with a registered broker or investment advisor before making any decisions based on your individual portfolio!).

The Good (Defensive or Enterprising and Fairly Valued)

  • Chubb Corporation (CB) – Chubb Corp is a very attractive company, having passed all of the requirements for both Defensive Investors and Enterprising Investors (note because Chubb is an insurance/financial company, the tests have been slightly modified).  The company has very strong financials, dividend history, and stable earnings.  From a valuation perspective, the company has achieved a moderate level of growth, having grown EPSmg (normalized earnings) from $5.57 in 2008 to an estimated $6.86 for 2013.  This moderate growth is in line with the market’s implied estimate of 2.81% and the company therefore would seem to be fairly valued at this time.  Investors seeking to add Chubb to their portfolio should proceed with further research to determine whether it is suitable for their individual portfolio, while keeping in mind the 7 Key Tips to Value Investing.
  • Genuine Parts Company (GPC) – Genuine Parts Company should be on the radar of every Enterprising Investor.  The company does not pass the requirements of the Defensive Investor, by having a current ratio that is too low and currently trading at a PEmg ratio just a little high, but it passes every single requirement of the Enterprising Investor.  The company has had stable earnings growth and dividend history, and generally looks good for the Enterprising Investor.  From a valuation perspective, the company appears to be fairly valued.  After growing EPSmg (normalized earnings) from $2.80 in 2008 to an estimated $3.83 for 2013, the market-implied growth rate of 6.43% is in line with the historical performance.  As a result, Enterprising Investors should feel comfortable if further research indicates the company may be suitable for their individual portfolios.

The Mediocre (Defensive or Enterprising and Overvalued)

  • Bemis Company (BMS) – Bemis Company has fairly healthy financials and appears to be a good company, but the earnings history is not as strong as one would like to see.  The company only passes five of our seven tests for the Defensive Investor, having failed the earnings growth test and the PEmg test.  As a result, it is not suitable for the Defensive Investor.  It does, however, pass four out of the five tests for the Enterprising Investor, failing only the Debt to Net Current Assets test.  As a result, it may be suitable for the Enterprising Investor, who is able to take on more risk by doing further research.  From a valuation side of things, the lack of earnings growth severely limits the value of the company.  By only growing EPSmg (normalized earnings) from $1.66 in 2008 to an estimated $1.81 for 2013, the company has achieved a marginal growth rate.  The market currently is implying growth of over 6.5%, which is well above what has been accomplished in the past.  As a result, the company would appear to be overvalued.  Any investor considering Bemis Company should do considerable further research before reaching a decision.

The Bad (Speculative and Undervalued or Fairly Valued)

  • CVS Caremark (CVS) – CVS Caremark is a very good company, but it just barely does not qualify as suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s current ratio is too low and the company is trading at a PEmg ratio above 20.  For the Enterprising Investor, the company has slightly too much debt, causing the debt to net current assets ratio to be too high as well as the current ratio.  From a valuation standpoint, the company fares well in the ModernGraham valuation model after having grown EPSmg (normalized earnings) from $1.86 in 2008 to an estimated $3.09 for 2013.  The market is implying a growth rate of 6.54%, which is in line with what the company has achieved in recent times.  Therefore, the company may be fairly valued at this time.  Any investor considering CVS Caremark should do considerable further research before deciding the company is right for an individual portfolio.

The Ugly (Speculative and Overvalued)

  • Colgate-Palmolive (CL) – Colgate-Palmolive has achieved moderate growth over the historical period, but does not meet the requirements of either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s current ratio is too low and the company is trading at too high a PEmg ratio and a too high PB ratio.  For the Enterprising Investor, the company’s current ratio is too low and the company’s debt to net current assets ratio is too high.  As a result, the company is too risky for either investor type and may only be considered as a speculative possibility.  From a valuation standpoint, the market is implying a growth rate of 8.70%, and while the company has grown its EPSmg (normalized earnings) from $1.54 in 2009 to an estimated $2.54 for 2014, that growth does not quite support the market’s estimation.  As a result, the company appears to be overvalued at this time.
  • Entergy Corporation (ETR) – Entergy Corporation fails to pass the requirements for either the Defensive Investor or the Enterprising Investor.  The company’s current ratio is too low for either investor type and the earnings growth have not been strong.  The EPSmg (normalized earnings) in 2008 was $5.48 and will only be an estimated $5.41 in 2013.  As a result, value investors following Benjamin Graham’s techniques from The Intelligent Investor should not invest in Entergy at this time unless they find a compelling reason otherwise while doing further research.  From purely a valuation perspective, the company appears to be overvalued at this time as well.  The poor earnings growth history does not support the market’s implied estimate of 1.48% growth, even though that figure is seemingly low.
  • Exelon Corporation (EXC) – Exelon Corp presents a rare situation where the ModernGraham valuation model returns a valuation of $0.  The earnings history of the company simply does not support a positive valuation, after having shrunk EPSmg (normalized earnings) from $3.28 in 2008 to an estimated $2.56 for 2013.  Since the valuation model relies heavily on earnings, that lack of growth bodes very poorly for the company.  It is possible the company is actually worth more than $0, but any value would have to come from the balance sheet itself and the balance sheet doesn’t seem to provide much indication of value either (the Net Current Asset Value is significantly negative).  As for the Defensive Investor and the Enterprising Investor, the company’s current ratio and poor earnings history eliminate Exelon from contention for investment by either investor type.  As a result, any investor seeking to purchase Exelon Corp. should do considerable further research to determine whether the company is suitable for investment, while keeping in mind the 7 Key Tips to Value Investing.
  • General Dynamics Corporation (GD) – General Dynamics Corp is a company that is damaged considerably by an extremely poor 2012 showing.  That year, the company’s EPS totaled a negative $0.94, a result that has had a clear effect on the company’s EPSmg (normalized earnings) as well as its performance in the tests for the Defensive Investor and Enterprising Investor.  The company fails to pass the requirements of either investor type because of the poor 2012 showing.  And let’s be clear here – even if the negative earnings of 2012 are related to a one-time charge or some exceptionally abnormal event, the fact remains that the company lost money that year, a result that is unacceptable to Intelligent Investors.  From purely a valuation perspective, the negative earnings of 2012 also has a profound effect.  By lowering the EPSmg for 2012 and 2013, it has significantly lowered the level of earnings growth we may be able to anticipate.  Therefore, the market seems to overvalue the company at this time by anticipating a growth rate of over 5% when the historical performance does not support it.  Any potential investor in General Dynamics would be very wise to consult with a registered broker and do considerably further research into the company before entering into any investment position.

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