Feature Stocks Value Investing Weekly

10 Companies in the Spotlight This Week – 12/28/13

bora bora beach sunsetWe looked at 10 different companies this week.  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)

  • National Oilwell Varco (NOV) – National Oilwell Varco is a very intriguing company, as it has passed every requirement of both the Defensive Investor and the Enterprising Investor, except for having a suitably long dividend history.  The company has proven to have stable earnings growth and has a very strong balance sheet.  In short, this company has outstanding fundamentals.  Defensive Investors and Enterprising Investors should proceed enthusiastically with further research, beginning with a review of ModernGraham’s Valuation of Baker Hughes Inc..  From a valuation standpoint, the company has grown EPSmg (normalized earnings) from $3.19 in 2008 to an estimated $5.01 for 2013, a solid level of growth.  The market currently implies a growth rate of only 3.51%, well below what has been seen historically.  As a result, the company would appear to be undervalued.
  • Oracle Corporation (ORCL) – Oracle Corporation is a company that has displayed strong and consistent earnings growth, and passes the majority of the requirements of both the Defensive Investor and the Enterprising Investor.  The company does not qualify for the Defensive Investor, however, because it is currently trading at a high PB ratio and it has not paid a dividend long enough.  The Enterprising Investor is not as picky and Oracle passes all five of the investor type’s requirements.  As a result, Enterprising Investors should feel comfortable proceeding with further research into whether Oracle would be suitable for their individual portfolios.  One example of further research would be to review the ModernGraham Valuation of International Business Machines (IBM) and the ModernGraham Valuation of Microsoft (MSFT).  From a valuation perspective, the company’s strong growth of EPSmg from $0.93 in 2009 to an estimated $2.15 for 2014 results in a very favorable result through the ModernGraham valuation model.  The market is currently implying a growth estimate of 4.19%, but Oracle has easily grown faster than that over the historical period we’ve reviewed, and would therefore appear to be undervalued at this time.

The Good (Defensive or Enterprising and Fairly Valued)

  • MTS Systems (MTSC) – MTS Systems is an attractive company for the Enterprising Investor, having passed all of the requirements of the investor type.  However, that is not the case for Defensive Investors.  The company’s current ratio is slightly below the threshold of the Defensive Investor, the PEmg and PB ratios are too high, and the company is too small for the Defensive Investor.  As a result, only Enterprising Investors should feel comfortable proceeding with further research into the company, perhaps by beginning with a review of the ModernGraham Valuation of General Electric.  From a valuation standpoint, the company has grown its EPSmg (normalized earnings) from $2.24 in 2008 to $2.94 in 2013.  This level of earnings growth is in line with the market’s implied estimate of 7.79%, and the company therefore seems to be fairly valued at this time.

The Mediocre (Defensive or Enterprising and Overvalued)

  • Monsanto Company (MON) – Monsanto Company passes all of the requirements of the Enterprising Investor, but not the Defensive Investor.  The company currently has PEmg and PB ratios that are too high for that investor type.  However, the Enterprising Investor is willing to take on a little more risk and as a result has some less stringent requirements.  The company has a strong dividend history and stable earnings growth, a very good current ratio and low debt.  As a result, Enterprising Investors should feel comfortable proceeding with further research, perhaps beginning with a review of ModernGraham’s valuation of Du Pont.  From the valuation side of things, the market is currently implying a growth rate of 11.51% and while there has been substantial growth in earnings, the historical performance does not support the implied growth rate.  Consequently, the company would appear to be overvalued today and Enterprising Investors may wish to wait for a better opportunity for profit.
  • Olin Corporation (OLN) – Olin Corporation appears to be a great company for both Defensive Investors and Enterprising Investors.  In fact, it passed all of the requirements of the Defensive Investor, which is not an easy feat to accomplish.  For the Enterprising Investor, the only negative is the high level of debt relative to current assets.  Either investor type should feel very comfortable proceeding with further research, beginning with a review of the 5 Undervalued Companies we reviewed last weekend.  However, from a valuation perspective the company would appear to be overvalued at the present time.  The EPSmg (normalized earnings) have only grown from $1.77 in 2008 to an estimated $2.03 for 2013.  This amount of growth does not quite support the market’s implied estimate of 2.79%, though it is very close to our margin of safety and some arguments could certainly be made in the comments below about whether the company is actually fairly valued.
  • Paychex, Inc. (PAYX) – Paychex, Inc. is an interesting company.  On the one hand, it has no long-term debt, but on the other hand it has a lot of current liabilities.  As a result, the current ratio is relatively poor but the company still passes the requirements of the Enterprising Investor.  The Defensive Investor has a lower risk tolerance, and the company does not pass his requirements due to the poor current ratio as well as high PEmg and PB ratios.  Enterprising Investors should feel comfortable proceeding with further research, perhaps by reviewing this month’s issue of ModernGraham Stocks & Screens to find other companies that may be suitable for investment.  From a valuation perspective, the company appears to be overvalued at the current time.  EPSmg (normalized earnings) have only grown from $1.41 in 2009 to an estimated $1.55 for 2014.  This is a very low level of growth that has been achieved in the historical period, and does not support the market’s implied growth rate of 10.39%.
  • Psychemedics Corp (PMD) – Psychemedics Corporation is a company to keep an eye on as its financial position is extremely strong but it has not developed the level of growth necessary to make it undervalued.  The company is not suitable for the Defensive Investor due to its small size, lack of growth, and high PEmg and PB ratios.  However, it is suitable for the Enterprising Investor after only failing the growth requirement.  As of now, the valuation is not strong as EPSmg have shrunk from $0.74 in 2008 to an estimated $0.58 for 2013.  Such change in EPSmg does not support the market’s implied growth estimate of 8.39%, and as a result the company would appear to be overvalued.  Going forward, Enterprising Investors should keep Psychemedics Corp on a watch list to see if the company improves in value.

The Bad (Speculative and Undervalued or Fairly Valued)

  • Simon Property Group (SPG) – Simon Property Group is a REIT that has shown strong earnings growth over the historical period.  Unfortunately, the company does not qualify for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company comes up short in the current ratio, and has PEmg and PB ratios that are too high.  For the Enterprising Investor, the company’s high level of debt relative to its current assets disqualifies it from potential investment.  Value investors seeking to follow ModernGraham’s modernized version of Benjamin Graham’s methods should do further research into other companies.  From a valuation perspective, Simon Property Group performs fairly well.  Its EPSmg (normalized earnings) have grown from $1.84 in 2008 to an estimated $4.10 for 2013.  This is strong growth that supports the market’s current estimate of 14.55% growth, leading to a conclusion that the company may be fairly valued at the current time.

The Ugly (Speculative and Overvalued)

Mr. Market

  • Natural Resource Partners LP (NRP) – Natural Resource Partners L.P. does not fare well in the ModernGraham valuation model after having dropped its EPSmg (normalized earnings) from $2.54 in 2008 to an estimated $1.43 for 2013.  The company fails the requirements for both the Defensive Investor and the Enterprising Investor.  For the Defensive Investor, the current ratio is not strong enough and the lack of earnings growth over the last ten years completely disappoints.  For the Enterprising Investor, there is too much long-term debt and again the lack of earnings growth presents too great a risk.  Either investor type should be very careful going forward and perhaps should consider looking at the 5 Undervalued Companies we looked at last weekend instead.  From a valuation perspective, the model looks very poorly upon shrinking earnings.  The historical earnings do not currently support a positive valuation, but for reference the market is implying a growth rate of 2.67%.  Since the earnings history cannot support the market’s implied growth rate, any value must come from the balance sheet itself.  We traditionally then turn to the net current asset value (NCAV) in that case, but here that is also negative.  As a result, ModernGraham cannot calculate a value for Natural Resource Partners without engaging in speculation, and one of the 7 Key Tips to Value Investing is to avoid speculating.
  • Realty Income Corp (O) – Like many REITs, Realty Income Corp does not fare well in the ModernGraham system.  The company does not pass enough requirements for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the fatal flaws are that its current ratio is far too low, it has not sufficiently grown earnings over the historical period, and it is trading at a high PEmg ratio.  For the Enterprising Investor, the high level of debt relative to the current assets causes the first two tests to fail.  Either investor type should proceed carefully with further research as the company is considered to be speculative due to the level of risk inherent in its current financials.  Maybe the risk ends up being worth it for some individuals, but keep in mind that following either the Defensive Investor or Enterprising Investor approach requires accepting minimal levels of risk as one of the 7 Key Tips to Value Investing is to never lose money.  From a valuation standpoint, the company’s low growth in EPSmg, from $0.98 in 2008 to an estimated $1.06 for 2013, results in a poor valuation.  The market is implying a growth rate of 13.56%, which is well above the growth seen in EPSmg over the historical period, and would indicate the company is currently overvalued.

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