Stocks Value Investing Weekly

10 Companies in the Spotlight this Week – 12/7/2013

bora bora beach sunsetWe 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)

  • Norfolk Southern Corp (NSC) – Norfolk Southern appears to be a very solid company that should be on the watch list of all Defensive Investors and Enterprising Investors.  The company passes all of the requirements of the Defensive Investor, except for the current ratio requirement.  While the company doesn’t pass enough of the Enterprising Investor tests as we would like to normally see, since it is suitable for the Defensive Investor, it is by default also suitable for the Enterprising Investor.  From a valuation perspective, the company has achieved solid growth recently, growing its EPSmg (normalized earnings) from $3.56 in 2009 to an estimated $5.22 for 2013.  This level of growth supports a valuation above where the market is currently trading.  As a result, Intelligent Investors should feel comfortable proceeding with further research to determine whether Norfolk Southern would be a good fit for their individual portfolios.

The Good (Defensive or Enterprising and Fairly Valued)

  • Target Corporation (TGT) – Target Corporation is a strong company that passes almost all of the requirements of the Defensive Investor, having only failed the current ratio test.  By default, the company is also suitable for the Enterprising Investor.  The company is achieving consistent growth while going from an EPSmg (normalized earnings) of $2.99 in 2009 to an estimated $3.96 for 2014.  However, it should be noted that it appears the EPSmg may be dipping slightly in 2014 from its level in 2013.  Assuming this historical growth rate continues, the company seems to be fairly valued by the ModernGraham valuation model, as the market is currently implying a growth rate of 3.66%, which is in line with the historical growth.  As a result, Defensive Investors and Enterprising Investors should feel comfortable proceeding with further research to determine whether Target Corporation is suitable for their individual portfolios.

The Mediocre (Defensive or Enterprising and Overvalued)

  • Garmin Limited (GRMN) – Garmin Limited is an excellent company with regard to the requirements of Defensive Investors and Enterprising Investors.  This company has strong financials, good dividend history, and stable earnings.  As a result, it passes every requirement of the Defensive Investor, which is a rare accomplishment.  However, from a valuation standpoint, the earnings growth has not been what it should be the last few years.  In 2008, the company had $2.92 in EPSmg (normalized earnings) and is estimated to have only $2.85 for 2013.  The company demonstrated superb growth early in the 2000s, but has failed to continue that pace.  At this time, the market is still implying a growth rate of 4.27%, a rate that is not supported by the earnings history.  As a result, despite being a very healthy company, Garmin appears to be overvalued.  It should remain on the radar of Defensive Investors and Enterprising Investors alike, but it may be best to wait for a better entrance point or for the company to improve its earnings.
  • Halliburton (HAL) – Halliburton Company should be on the radar of both Defensive Investors and Enterprising Investors.  It does not meet the requirements for the Defensive Investor at this time, but the only tests it failed were related to the PEmg ratio and the PB ratio (both are too high).  As these tests are both related to the price, it is very possible the company could become suitable for Defensive Investors if the price were to drop a bit.  Halliburton Company does pass all of the requirements of the Enterprising Investor, and as such this investor type should continue with further research.  From a valuation standpoint, the company appears to be slightly overvalued.  The EPSmg (normalized earnings) have grown from $2.20 in 2008 to an estimated $2.52 for 2013, a level of growth that does not support the market’s implied estimate of 6.21%.
  • National Presto Industries (NPK) – National Presto Industries is one of my personal favorite companies.  The balance sheet is amazingly strong, with a current ratio of 5.01 and no long term debt.  The company passes all of the requirements of the Defensive Investor, with the exception of the market cap is lower than the Defensive Investor would prefer.  The company also passes all of the requirements of the Enterprising Investor except the earnings growth over the last five years has slowed, giving a slight pause to Enterprising Investors.  However, as it stands now the company remains suitable to both the Defensive Investor and the Enterprising Investor, and they should feel comfortable continuing with further research of the company.  From a valuation standpoint, National Presto Industries appears overvalued at this time based on the ModernGraham valuation model.  The market is implying a growth rate of only 1.7%, but the historical earnings growth does not quite support that.  While earnings are well above where they were ten years ago, it would be nice if the company could return to the levels of 2009-10.  As a result, Defensive Investors and Enterprising Investors should keep a close eye on National Presto Industries to see if the price comes down to a more attractive point or if the earnings rise to improve the valuation.
  • Occidental Petroleum (OXY) – Occidental Petroleum is a solid company based on its financial history.  The company passes all of the requirements for the Defensive Investor, except for the current ratio requirement.  As a result, the company is by default also suitable for the Enterprising Investor.  The company’s earnings have fluctuated significantly from year to year, but the overall trend is one of slow growth.  From a valuation standpoint, the market is currently implying a growth rate of 3.09%, which is a little higher than what’s been seen during the historical period we’ve reviewed.  As a result, based on the historical achievements of Occidental Petroleum, the market price seems slightly overvalued right now.  However, Defensive Investors and Enterprising Investors alike should keep the company on a watch list to see if the price becomes a little more attractive.  When it does, those investors should feel comfortable conducting further research to determine whether Occidental Petroleum is right for their individual portfolios.
  • Regal Beloit Corporation (RBC) – Regal-Beloit Corporation is one of my personal favorites.  The company passes every single requirement of both the Defensive Investor and the Enterprising Investor.  There are stable earnings, dividends, low debt, and everything else an Intelligent Investor would like to see in a company.  However, just like many other companies in today’s market environment, the current price seems slightly overvalued.  EPSmg (normalized earnings) have grown from $3.26 in 2008 to an estimated $4.08 for 2013, and the growth has been pretty consistent over that period, but the market is implying a rate of 4.58% which is a little above what’s been seen.  As a result, Regal-Beloit should be on all the short list of all Defensive Investors and Enterprising Investors for a time when the price dips a little bit and at that time investors should feel comfortable proceeding with further research to determine whether Regal-Beloit is suitable for their individual portfolios.
  • Texas Instruments (TXN) – Texas Instruments Incorporated is not suitable for the Defensive Investor after failing to adequately grow its earnings and trading at high PEmg and PB ratios.  However, the company may be suitable for the Enterprising Investor, who is willing to take on more risk than his Defensive Investor counterpart.  The company passes all of the requirements for the Enterprising Investor, and further research is therefore warranted.  From a valuation perspective, Texas Instruments has grown its EPSmg (normalized earnings) from $1.56 in 2008 to an estimated $1.86 for 2013.  This level of growth that has been achieved historically is not as high as the market’s implied estimate of over 7%.  As a result, the company appears to be overvalued at the present time.  Enterprising Investors should keep the company on a watch list in the hopes that earnings turn out to be higher than expected, thus raising the valuation, or the price lowers to a more intriguing level.

The Bad (Speculative and Undervalued or Fairly Valued)

  • None this week.

The Ugly (Speculative and Overvalued)Mr. Market

  • Lowe’s Companies (LOW) – Lowe’s Companies is not very attractive from a ModernGraham perspective at this time.  The company has failed to adequately grow earnings over the last ten years, has a poor current ratio, and trades at high PEmg and PB ratios.  As a result, it does not pass the requirements of either the Defensive Investor or the Enterprising Investor.  The company has only grown EPSmg (normalized earnings) from $1.71 in 2009 to an estimated $1.73 for 2014, a result that does not even come close to supporting the 9.31% growth rate implied by the market.  It’s likely this company is overvalued right now, presumably because the market expects Lowe’s to do better once the housing market recovers, and it’s true that the company should do better and has shown some improvements over the last few years.  However, value investors should wait to see if the company can prove itself before getting involved in speculating about the future earnings.  After all, value investing is all about fundamental analysis and the fundamentals don’t currently support the market’s implications here.
  • Nucor (NUE) – Nucor is a company that needs to stabilize its earnings as soon as possible.  As it stands, the company is not suitable for either the Defensive Investor or the Enterprising Investor primarily because of the instability of the earnings and lack of growth.  From a valuation standpoint, the company presents a situation where any value must come from the balance sheet because the earnings history does not support a positive estimate of growth.  The company’s EPSmg (normalized earnings) have dropped significantly each year over the historical period we’ve reviewed.  Meanwhile, the market is implying the company will grow at over 12%.  Even if you assume the earnings will not drop any further, and will grow at 3% going forward, the valuation would only be $22, well below the market’s current level.  As a result, any value must come from the balance sheet rather than the earnings, and the clearest metric of balance sheet value is the Net Current Asset Value (NCAV).  Unfortunately, Nucor’s NCAV is negative.  Therefore, not only is the company considered speculative based on the failure to meet the Defensive Investor or Enterprising Investor’s requirements, it should be considered speculative from a valuation basis as well.  The fundamentals simply do not support a solid valuation at this time.

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