Feature Stocks Value Investing Weekly

14 Companies in the Spotlight This Week – 1/18/14

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)

  • Capital One Financial (COF) – Capital One Financial is a company that stands out from its peers, having survived the financial meltdown without posting a negative earnings year.  This company is not suitable for the Defensive Investor, due to not sufficiently growing earnings over the ten year period, but it is suitable for the Enterprising Investor.  Capital One appears to have solid earnings stability, a strong dividend history, and is trading at low PEmg and PB ratios.  Value investors seeking to follow Benjamin Graham’s methods for the Enterprising Investor should feel very comfortable proceeding with further research, beginning with a review of ModernGraham’s Valuation of American Express (AXP).  In terms of a valuation, the company has grown EPSmg (normalized earnings) from $3.14 in 2009 to an estimated $6.36 in 2013.  This is solid growth that more than supports the market’s implied estimate for growth of 1.88%, indicating the company may be undervalued presently.
  • Covidien Ltd (COV) – Covidien Ltd is a company that presents a great opportunity for Enterprising Investors.  The company does not qualify for the Defensive Investor, though, because of its lack of earnings stability, dividend history, and it is currently trading at high PEmg and PB ratios.  The company does qualify for the Enterprising Investor, and this type of value investor following Benjamin Graham’s methods should feel comfortable proceeding with further research.  One suggestion for further research would be a review of ModernGraham’s valuation of Johnson & Johnson (JNJ).  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.83 in 2008 to $3.47 in 2013.  This level of earnings growth more than supports the market’s implied growth estimate of 5.79%, and the company appears to be undervalued at the present time.

The Good (Defensive or Enterprising and Fairly Valued)

  • No companies fit these criteria this week.

The Mediocre (Defensive or Enterprising and Overvalued)

  • Dow Chemical (DOW) – Dow Chemical Corp is a strong company that qualifies for the Enterprising Investor but just misses the mark for the Defensive Investor.  The company has not sufficiently grown its earnings over the ten year period and is trading at too high a PEmg ratio for the Defensive Investor.  However, the Enterprising Investor is not quite as strict and is willing to accept a slightly higher level of risk.  As a result, Enterprising Investors following Benjamin Graham’s value investing methods should feel comfortable proceeding with further research, perhaps beginning with a review of ModernGraham’s valuation of Exxon Mobil (XOM).  From a valuation perspective, the company has only grown its EPSmg (normalized earnings) from $1.66 in 2009 to an estimated $1.91 for 2013.  This historical performance does not support the market’s implied estimate of growth of 6.72%, so the company would appear to be overvalued at the present time.

The Bad (Speculative and Undervalued or Fairly Valued)

  • Comcast Corporation (CMCSA) – Comcast Corporation appears to present a very good value opportunity, but may present too much risk for investors seeking to follow Benjamin Graham’s value investing strategies.  The company is not suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s current ratio is too low, the company does not have a long enough recent history of paying dividends, and the company is trading at high PEmg and PB ratios.  For the Enterprising Investor, the company holds too much debt relative to its current assets.  As a result, the company presents a little more risk than we like to see, and investors may wish to seek other opportunities, perhaps beginning with a review of ModernGraham’s analysis of Verizon Communications (VZ).  As for the valuation, the company has grown EPSmg (normalized earnings) from $0.70 in 2008 to an estimated $1.98 for 2013.  This is a solid level of growth that outpaces the market’s implied estimate of 9.24%, and the company would therefore seem to be undervalued.
  • Conoco-Phillips (COP) – Conoco Phillips appears to be an undervalued company, but it does not qualify for either the Defensive Investor or the Enterprising Investor.  The company has a current ratio that is too low for either investor type, has not had stable earnings for the ten year period, and has not sufficiently grown earnings over the ten year period to satisfy the Defensive Investor.  As a result, value investors seeking to follow Benjamin Graham’s methods may wish to look for other opportunities, beginning with a review of ModernGraham’s valuation of Chevron Corp (CVX), which is suitable for these investors and is significantly undervalued.  From a valuation perspective the company looks great, though, after growing EPSmg (normalized earnings) from $1.81 in 2008 to an estimated $6.82 for 2013.  This level of growth far outpaces the market’s implied estimate of 0.8%, indicating the company may be undervalued at the present time.
  • Costco Wholesale (COST) – Costco Wholesale Corp is a great place to shop at, but not such a great company to invest in presently.  The company does not qualify for the Defensive Investor because its current ratio is too low, and it is currently trading at high PEmg and PB ratios.  The Enterprising Investor also does not like Costco right now because the company has too much debt relative to its current assets.  As a result, value investors may seek to find other opportunities, beginning with a review of ModernGraham’s valuation of Target Corp (TGT).  From a valuation perspective, the company does appear to be trading at a fair price.  The EPSmg (normalized earnings) have grown from $2.52 in 2009 to an estimated $4.23 for 2014, and the growth has been consistent over the time period.  The market is currently implying a growth rate estimate of 9.67%, which is in line with what has been seen historically.  As a result, the company appears to be fairly valued.
  • Ingersoll-Rand (IR) – Ingersoll-Rand appears to be undervalued, but just barely misses the mark for the Enterprising Investor by having a little too much debt relative to its current assets.  The company does not qualify for the Defensive Investor because of its lack of earnings stability or growth over the ten year period, its low current ratio, and its high PEmg and PB ratios.  Enterprising Investors should keep a very close eye on Ingersoll-Rand to see if the debt level improves.  Meanwhile, value investors seeking to follow Benjamin Graham’s methods should review other opportunities by looking at companies that pass the ModernGraham requirements.  With regard to the valuation, the company has grown its EPSmg (normalized earnings) from -$0.95 in 2008 to an estimated $2.33.  This demonstrates a level of growth that is superior to the market’s implied estimate for growth of 9.26%.  As a result, the company appears to be undervalued presently.

The Ugly (Speculative and Overvalued)

Mr. Market

  • Campbell Soup Co. (CPB) – Campbell Soup Co. is an average company that does not qualify for either the Defensive Investor or the Enterprising Investor.  The failings for the Defensive Investor include the current ratio is too low, there has not been sufficient growth in earnings over the ten year period, and the company trades at a high PB ratio.  As for the Enterprising Investor, the level of debt relative to the current assets is too high.  Therefore, value investors seeking to follow Benjamin Graham’s methods should seek other opportunities.  As for a valuation, the company has grown EPSmg (normalized earnings) from $1.92 in 2009 to an estimated $2.36 for 2014.  This level of growth does not support the market’s implied estimate of 4.84%, indicating the company may be overvalued at the present time.
  • Computer Sciences Corp (CSC) – Computer Sciences Corp has been significantly affected by the large loss in earnings during 2012.  The loss was so great that it alone has caused the company to fail two of the requirements of the Defensive Investor and two of the requirements of the Enterprising Investor.  As a result, for the next few years, this company will not be suitable for either investor type, until the company has recovered from the effects of posting such a deficit.  Value investors seeking to follow Benjamin Graham’s methods may be better suited with other opportunities, and may wish to review ModernGraham’s valuation of International Business Machines (IBM).  From a valuation perspective, the loss also affects the way the ModernGraham valuation model views the company.  EPSmg (normalized earnings) dropped from $4.31 in 2009 to an estimated -$2.31 for 2014, clearly due to the fact that EPSmg takes into account each of the last five years of earnings data when determining a normalized earnings figure.  Such a drop in earnings leads the model to return a poor valuation, indicating that any value in the company must come from a source other than the earnings.
  • Devon Energy Corp (DVN) – Devon Energy Corp is a company that has had some very wide swings in the business cycle, including three negative years out of the last ten.  It is this earnings instability, along with a poor current ratio and a high PEmg ratio that disqualifies the company from the Defensive Investor’s selection.  For the Enterprising Investor, the lack of earnings stability and high debt relative to current assets eliminates the company from further consideration.  Therefore, value investors seeking to follow Benjamin Graham’s methods should seek other opportunities, such as by reviewing ModernGraham’s valuations of Exxon Mobil (XOM) and Conoco Phillips (COP).  As for a valuation, the company has grown its EPSmg (normalized earnings) from -$1.27 in 2009 to an estimated $1.28 for 2013.  However, the market is currently implying a growth rate estimate of 19.04%, a rate which is not quite supported by the company’s historical growth.  As a result, the company appears to be overvalued currently.
  • E*Trade Financial Corp (ETFC) – E*Trade Financial Corporation is not suitable for either the Defensive Investor or the Enterprising Investor.  While the company has improved its earnings situation in the recent history, it lacks the level of stability that we would like to see, and does not pay dividends.  Value investors seeking to follow Benjamin Graham’s methods should research other opportunities, beginning with a review of ModernGraham’s list of companies that pass these requirements.  From a valuation perspective, the company has improved its EPSmg (normalized earnings) from -$12.25 in 2009 to an estimated -$0.71 for 2013.  This is solid improvement, however, the ModernGraham valuation model does not determine a value for companies that exhibit negative EPSmg.  As a result, investors must turn to the balance sheet or other methods to determine value because the company’s value does not presently come from the earnings or dividends, but must remember that avoiding speculating is one of the 7 Key Tips to Value Investing.
  • Gilead Sciences (GILD) – Gilead Sciences Inc. presents too much risk for either the Defensive Investor or the Enterprising Investor.  The only things the Defensive Investor likes about this company are the market cap and the earnings growth over the ten year period.  The company’s current ratio is too low, it does not pay dividends, it had a negative earnings year within the last ten years, and it trades at high PEmg and PB ratios.  As for the Enterprising Investor, the company does not qualify because it does not pay a dividend and it holds too much debt relative to its current assets.  Therefore, value investors seeking to follow Benjamin Graham’s methods should review other opportunities, perhaps by reviewing our valuation of Pfizer (PFE).  As for a valuation, the company has shown a solid level of growth, having risen EPSmg (normalized earnings) from $0.52 in 2008 to an estimated $1.70 for 2013.  However, the market is implying a growth rate of 17.88%, which is above what has been demonstrated by the company historically.  As a result, the company appears to be overvalued presently.
  • Hewlett Packard (HPQ) – Hewlett-Packard Company is very poorly affected by its negative earnings year in 2012, and it is likely to take a few years before the company becomes suitable for the Defensive Investor or Enterprising Investor.  For the Defensive Investor, the low current ratio, poor earnings stability, lack of earnings growth over a ten year period, and high PEmg ratio are all disqualifiers.  For the Enterprising Investor, the high level of debt relative to current assets, poor earnings stability, and the lack of earnings growth over the five year period are turn-offs.  Value investors seeking to follow Benjamin Graham’s methods should therefore spend some time considering other opportunities, beginning with reviewing ModernGraham’s valuation of Microsoft (MSFT).  As for a valuation, the company’s EPSmg (normalized earnings) have gone from $2.41 in 2008 to an estimated $0.53 for 2013.  This considerable drop in earnings results in a poor valuation from the ModernGraham valuation model, and certainly does not support the market’s implied estimate of 23.67% growth in earnings.  As a result, the company appears to be overvalued currently.
  • Honeywell International (HON) – Honeywell International Inc. is a good company that just misses the mark for both the Defensive Investor and the Enterprising Investor.  The company does not have a strong enough current ratio, and is trading at too high of PEmg and PB ratios for the Defensive Investor.  For the Enterprising Investor, the company holds too much debt relative to its current assets.  Value investors seeking to follow Benjamin Graham’s methods should research other opportunities, beginning with a review of our valuation of United Technologies Corporation (UTX).  From a valuation side of things, the company has exhibited some growth in EPSmg (normalized earnings), going from $2.95 in 2008 to an estimated $3.63 for 2013.  However, the market is currently implying a growth estimate of 8.14%, which is higher than has been seen historically.  As a result, Honeywell would appear to be overvalued at the current time.

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