Feature Stocks Value Investing Weekly

14 Companies in the Spotlight This Week – 1/11/14

bora bora beach sunsetWe looked at 14 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)

  • Cigna Corp (CI) – Cigna Corporation is an intriguing company for both the Defensive Investor and the Enterprising Investor.  The company passes all of the requirements of each investor type, indicating it has strong financials and a strong history.  This is a company that presents a low level of risk of significant loss for investors.  Intelligent Investors seeking to follow Benjamin Graham’s value investing methods should feel comfortable proceeding with further research into the company, but should keep in mind the 7 Key Tips to Value Investing as they do so.  From a valuation standpoint, the company has grown EPSmg (normalized earnings) from $2.76 to an estimated $5.23 for 2013 and has consistently shown a solid level of growth each year.  The market is currently implying a growth rate of 4.2%, which is below what has been seen historically.  As a result, Cigna Corporation would appear to be undervalued at the current time.

The Good (Defensive or Enterprising and Fairly Valued)

  • Allstate Corp (ALL) – Allstate Corp (ALL) had a negative year in 2008, but that was now long enough ago that the Enterprising Investor will overlook it.  The Defensive Investor, however, looks at a longer period and requires positive earnings for at least ten straight years; consequently the company is suitable for the Enterprising Investor but not the Defensive Investor.  Enterprising Investors should feel comfortable proceeding with further research, beginning with a review of ModernGraham’s Valuation of Travelers Companies.  From a valuation perspective, the company has not seen significant growth in EPSmg (normalized earnings) when looking at the full six year history, but it has seen some growth in the last few years that may support the market’s current implied growth estimate of 3.89%.  As a result, the company would appear to be fairly valued.

The Mediocre (Defensive or Enterprising and Overvalued)

  • No companies we reviewed fit this criteria this week.

The Bad (Speculative and Undervalued or Fairly Valued)

  • Avery Dennison Corp (AVY) – Avery Dennison Corp fails to satisfy either the Defensive Investor or the Enterprising Investor following Benjamin Graham’s value investing methods.  The company’s current ratio is too low for either investor type, it has not had sufficient earnings stability, it hasn’t had suitable earnings growth over the long term for the Defensive Investor, and it trades at PEmg and PB ratios that are too high.  Either investor type should do considerably more research before entering any investment in Avery Dennison Corp, beginning with a review of ModernGraham’s Valuation of Bemis Company.  As for a valuation, the company has grown EPSmg (normalized earnings) from $-0.41 in 2009 to an estimated $1.43.  This level of growth supports the market’s implied growth rate of 13.03%, so the company may appear to be fairly valued.  However, it should be noted that in 2008 the EPSmg was $2.99, so the growth may not quite be what it seems.  This adds fuel to the fire that Avery Dennison Corp may be more suitable to speculators than Intelligent Investors.
  • Bank of New York Mellon (BK) – Bank of New York Mellon presents an interesting situation.  The company does not qualify for the Defensive Investor because it has not had earnings stability over the ten year period and has not adequately grown its earnings during that time frame.  As for the Enterprising Investor, the company just barely doesn’t meet the criteria, because it had a negative earnings year in 2009.  This is interesting because once we move into the new year of estimates for earnings (for ModernGraham that will not occur until after the first quarter’s earnings are released), this company will meet the final criteria for the Enterprising Investor.  So this may be a situation where an Enterprising Investor takes a leap into what we normally would consider a “Speculative” company, but Enterprising Investors may be interested in reviewing ModernGraham’s Valuation of JP Morgan Chase first.  From the valuation perspective, Bank of New York Mellon looks very attractive.  The company has grown EPSmg (normalized earnings) from $0.88 in 2009 to an estimated $1.78 in 2013.  This level of growth outpaces the market’s implied estimate of 5.44%, and the company would appear to be undervalued at the present time.
  • Cablevision Systems Corp (CVC) – Cablevision Systems Corp is a company that has demonstrated solid growth in EPSmg (normalized earnings) in recent years, but does not satisfy the requirements for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s failings are its current ratio being too low, and its lack of stable earnings, earnings growth, and dividend payments over the 10 year period.  For the Enterprising Investor, the company fails because it has too much debt relative to its current assets.  Value investors seeking to follow Benjamin Graham’s methods should seek a lower risk level than is present in Cablevision Systems Corp by researching companies that are suitable for Defensive and Enterprising Investors.  From a valuation side of things, the company’s recent growth in EPSmg from -$0.54 in 2008 to an estimated $0.95 for 2013 results in a strong valuation.  The market is currently implying a growth rate estimate of 4.73%, which is significantly lower than what has been seen historically.  As a result, the company would appear to be undervalued presently.
  • CBRE Group, Inc. (CBG) – CBRE Group Inc. is yet another company in a long line of recent reviews that is not suitable for either the Defensive Investor or the Enterprising Investor.  It’s important to note that one of the reasons we put companies through these requirements is to eliminate all but those that present the least amount of risk to investors.  CBRE Group is no different; the company has not had stable earnings over the last ten years, does not pay dividends, has a poor current ratio, has not grown earnings over the ten year period, and is trading at high PEmg and PB ratios.  Defensive Investors and Enterprising Investors would be better suited looking at less risky companies that pass these tests.  From a valuation perspective, the company actually fares somewhat well, having grown EPSmg (normalized earnings) from -$0.76 in 2008 to an estimated $0.90 for 2013.  The market is currently implying a growth rate of 10.31%, and that rate is supported by the historical performance.  As a result, the company would appear to be fairly valued at the present time.
  • CBS Corp (CBS) – CBS Corp is a company that has seen a surge over the last few years, growing EPSmg (normalized earnings) from -$6.99 in 2008 to an estimated $2.20 for 2013.  However, the company does not satisfy the requirements for either the Defensive Investor or Enterprising Investor.  The current ratio is too low for either investor type, the company had some negative earnings years in the 10 year period, the earnings have not grown sufficiently over the 10 year period, and the PEmg ratio is too high.  As a result, Intelligent Investors seeking to follow Benjamin Graham’s value investing methods may wish to seek other opportunities.  From a valuation side, due to the solid growth in earnings recently, the company fares well, and would appear to be undervalued at the present time.

The Ugly (Speculative and Overvalued)

Mr. Market

  • AES Corp (AES) – AES Corp fails nearly all of the requirements of both the Defensive Investor and the Enterprising Investor.  The only thing Intelligent Investors following Benjamin Graham’s value investing methods would like about this company are the market cap, the PB ratio, and the fact that it currently pays a dividend.  From a value investing standpoint, there is simply too much risk involved in this company for Intelligent Investors.  From a valuation side of things, the company does not fare well in the ModernGraham valuation model.  The company has seen a drop in its EPSmg (normalized earnings) from $1.05 in 2008 to an estimated $0.10 for 2013.  This negative growth results in a valuation of $0 in the model, indicating that any value must come from the balance sheet rather than earnings.  Since the net current asset value is also negative, the company would appear to be overvalued at this time.
  • Amazon Inc. (AMZN) – Value investors seeking to follow Benjamin Graham’s methods have established criteria for whether a company is worthy of investment; in the case of Amazon, the company scores almost as poorly as is possible under these requirements.  In fact, the only requirement for either the Defensive Investor or the Enterprising Investor that Amazon satisfies is the market cap.  As a result, includes a level of risk that is far too high for either investor type, and Intelligent Investors would be best suited by researching other opportunities, beginning with a review of ModernGraham’s Valuation of Apple.  From a valuation side of things, Amazon’s EPSmg (normalized earnings) have dropped from $1.08 in 2008 to an estimated $0.90.  This drop in earnings leads the ModernGraham valuation model to return an intrinsic value of $0, indicating that any value in the company must come from something other than earnings.  It should also be noted that the market seems to be implying a growth rate of over 200%, which is far above what the company has achieved historically.  As a result, Amazon would appear to be overvalued at this time.
  • American International Group (AIG) – American International Group is a company that is coming out of a very dark point in its history.  At this point in the turnaround, the company has yet to satisfy Defensive Investors or Enterprising Investors.  Defensive Investors look at a ten year history and require positive earnings and dividend payments throughout that period, but since American International Group had such large losses at the heart of the financial crisis, the Defensive Investor is not yet comfortable with the company.  Enterprising Investors look at only a five year history, so they are much closer to accepting the company as a potential investment, but the loss in 2009 still eliminates the company from contention for this investor type.  Therefore, Intelligent Investors seeking to follow Benjamin Graham’s value investing methods may wish to seek other opportunities by reviewing ModernGraham’s list of Defensive and Enterprising Companies.  From a valuation standpoint, the company has seen some growth, but the market is currently implying a growth rate above what has been seen historically.  As a result, the company appears to be overvalued at this time.
  • Avon Products, Inc. (AVP) – Avon Products is another company that fails to satisfy either the Defensive Investor or the Enterprising Investor.  The company has seen its earnings falling over the historical period, and it has even seen a negative earnings year.  In addition, the company is trading at a high PEmg and a high PB ratio.  All of these things indicate to value investors that the company entails a level of risk that should be averted.  It is difficult for an investor to place money in a risky investment without it turning into speculating, and one of the 7 Key Tips to Value Investing is to avoid speculation.  From a valuation perspective, the company’s drop in earnings leads to the ModernGraham valuation model concluding that no value comes from the earnings.  Meanwhile the market is implying a growth rate in earnings of over 10%, which is clearly not supported by the historical performance.  As a result, Avon would appear to be overvalued at this time.
  • Bank of America Corp (BAC) – Bank of America Corp is not suitable for either the Defensive Investor or the Enterprising Investor.  The company has not had stable earnings over the last five years, has not adequately grown its earnings over the last five or ten years, and is currently trading at a high PEmg ratio.  As a result, Defensive Investors and Enterprising Investors may wish to seek other opportunities.  From a valuation perspective, the company’s drop in EPSmg (normalized earnings) from $2.77 in 2008 to an estimated $0.28 for 2013 results in a very poor intrinsic value from the ModernGraham valuation model.  The market is currently implying a growth rate of 25.86%, well above what has been seen historically (especially considering the company has seen a drop in earnings).  It would appear that Bank of America is overvalued at the current time, and value investors seeking to follow Benjamin Graham’s methods may wish to wait until the company has a better recent history.
  • Chesapeake Energy Corp (CHK) – Chesapeake Energy Corp has shown a good level of growth over the recent period, but it does not qualify for either the Defensive Investor or the Enterprising Investor.  The company’s current ratio is far too low for either investor type, the company has not had stable earnings or earnings growth over the ten year period, and the company is currently trading at a high PEmg ratio.  Value investors such as these, seeking to follow Benjamin Graham’s methods, should research other opportunities, including reviewing ModernGraham’s valuation of Schlumberger Ltd.  From a valuation perspective, the company appears overvalued despite its growth in EPSmg (normalized earnings) from $-1.66 in 2009 to an estimated $0.13 for 2013.  The market is currently implying a growth estimate of 92% from the current EPSmg figure of $0.13, which is significantly higher growth than what has been demonstrated historically.
  • Citigroup Inc. (C) – Citigroup Inc. presents a rare situation.  The company had a large loss in 2008 due to the financial meltdown, and this loss is still affecting the analysis through the ModernGraham model.  It would be very easy to modify the model at this point to eliminate the effect of the 2008 loss, under the rationale that it was an extraordinary event that is not likely to be repeated.  However, that would in essence ignore the fact that the company did lose money in 2008, at a rate that is so high that the company is still recovering from it.  One cannot simply overlook a loss, regardless of the circumstances.  Losing money is losing money, and one of the 7 Key Tips to Value Investing is to not lose money, whether that is at the corporate level or at an individual shareholder level.  Therefore, until the EPSmg (normalized earnings) have recovered from the significant losses of the 2008-2009 period, Citigroup will not be considered suitable for either the Defensive Investor or the Enterprising Investor.

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