15 Companies in the Spotlight This Week – 2/1/14

We looked at 15 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, which was just released this week!

The Elite (Defensive or Enterprising and Undervalued)

  • 500px-Bedbath&beyond.svgBed Bath & Beyond (BBBY) - Bed Bath & Beyond Inc. is an extremely interesting company for value investors.  It is not suitable for the Defensive Investor, by not paying dividends and by trading at a high PB ratio, but it is suitable for the Enterprising Investor because its balance sheet and earnings history are strong enough to overcome the lack of dividend payments.  As a result, Enterprising Investors seeking to follow the ModernGraham methods, based on Benjamin Graham’s classic The Intelligent Investor, should feel comfortable proceeding with further research into the company and comparing its prospects against other companies that pass the ModernGraham requirements such as through a review of ModernGraham’s analysis of Target Inc. (TGT).  From a valuation perspective, the company looks great, having grown EPSmg (normalized earnings) from $1.89 in 2008 to an estimated $4.20 for 2013.  This outstanding level of growth far surpasses the market’s implied growth rate of 3.50%, and the ModernGraham valuation model returns an intrinsic value that is considerably higher than the current market price.

 

  • 500px-CA_Technologies_brand.svgCA Technologies (CA) - CA Technologies looks very good in the ModernGraham approach based on Benjamin Graham’s methods for value investors.  The company passes the requirements of the Defensive Investor, failing only the current ratio requirement, and as a result is suitable for both Defensive Investors and Enterprising Investors.  All Intelligent Investors should feel comfortable proceeding with further research to determine if CA Technologies would be right for their individual portfolios, and that research may include reviewing other companies that pass the ModernGraham requirements with a particular emphasis on a comparison with ModernGraham’s valuation of International Business Machines (IBM) and ModernGraham’s valuation of Oracle Corp (ORCL).  From a valuation perspective, CA Technologies also looks good, having grown its EPSmg (normalized earnings) from $0.76 in 2009 to an estimated $2.02 for 2013.  This is a solid level of growth that leads the ModernGraham valuation model to calculate an intrinsic value that surpasses the market’s current price.  Therefore, the company appears to be undervalued at the present time.

 

  • 500px-Caterpillar_logo.svgCaterpillar Inc. (CAT) - When we last looked at Caterpillar Inc. (here’s the previous review), it was suitable for both the Defensive Investor and the Enterprising Investor, and was undervalued.  In the last 3 months the conclusion has not changed, though the market has brought the price up 9.72%.  The company remains suitable for the Defensive Investor even though the current ratio is a bit too low, and the company is suitable for the Enterprising Investor by default due to its suitability for the Defensive Investor.  As a result, value investors seeking to follow the ModernGraham method should feel comfortable proceeding with further research, perhaps through a review of ModernGraham’s valuation of General Electric (GE) or other companies that pass the ModernGraham requirements.  From a valuation perspective, the intrinsic value returned by the ModernGraham model has increased slightly since the last valuation due to the fact the actual earnings for 2013 were higher than estimated.  The model returns a figure that indicates the market price is less than the intrinsic value, and the company appears to be undervalued.  It should be noted that the market is currently implying a growth rate for earnings of 3.08%, which is well below the growth the company has demonstrated in recent years.

 

  • 500px-Time_Warner_wordmark.svgTime Warner Inc. (TWX) Time Warner Inc. has vastly improved its EPSmg (normalized earnings) over the last 6 years.  While the company remains unsuitable for the Defensive Investor, it is suitable for the Enterprising Investor.  It fails to qualify for the Defensive Investor because of its low current ratio, its lack of earnings stability or growth over the ten year period, and its high PEmg ratio.  It should be noted, though, that it barely qualifies for the Enterprising Investor as its current ratio is 1.51, just a tad higher than the 1.5 minimum requirement.  Value Investors seeking to follow Benjamin Graham’s methods should compare Time Warner to other companies, perhaps beginning with a review of ModernGraham’s valuation of CBS Corporation (CBS), and ModernGraham’s valuation of Comcast Corporation (CMCSA).  From a valuation perspective, the company looks very appealing.  EPSmg have grown from -$1.77 in 2008 to an estimated $3.10 for 2013.  This level of growth supports a valuation much higher than the market price, and the company would appear to be overvalued.

 

  • 500px-U.S._Bancorp_logo.svgU.S. Bancorp (USB) - U.S. Bancorp is very impressive, and is in fact one of the healthiest banks I have reviewed using the ModernGraham model.  The company nearly qualifies for the Defensive Investor, which is a very difficult task for financial companies in the wake of the financial crisis.  The only problem a Defensive Investor has with the company is the lack of sufficient growth in earnings over the ten year period.  The Enterprising Investor is not swayed away from the company, though, and should feel comfortable proceeding with further research such as a review of ModernGraham’s valuation of JP Morgan (JPM) or ModernGraham’s valuation of Capital One Financial (COF).  From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $1.75 in 2009 to $2.55 for 2013.  While this is not a huge level of growth, the market is only implying a growth estimate of 3.63%, which is more than supported by the growth seen historically.  As a result, the intrinsic value of the company is significantly higher than the market price, and the company appears to be undervalued.

 

  • 500px-Wells_Fargo_Bank.svgWells Fargo Corp (WFC) - After looking at the fundamentals, Wells Fargo remains an extremely intriguing company that value investors seeking to follow Benjamin Graham’s methods should be interested in researching further.  The company passes all of the requirements for both the Defensive Investor and the Enterprising Investor.  Investors should be eager to compare Wells Fargo to its competitors by reviewing the ModernGraham valuations of JP Morgan Chase (JPM) and Bank of America (BAC).  From a valuation side of things, the company fares well after growing its EPSmg (normalized earnings) from $1.73 in 2009 to $3.17 for 2013.  It is particularly noteworthy that the earnings are even greater now than they were just before the crisis, a time when banks were “booming.”  The market is currently implying a growth rate of 2.93%, but based on the historical performance of the company that growth rate should easily be beat.  As a result, the company’s intrinsic value appears much higher than the market price, and the company appears to be undervalued.

The Good (Defensive or Enterprising and Fairly Valued)

  • eBay Inc. (EBAY) - eBay appears to be a very solid company that should intrigue value investors that classify themselves as Enterprising Investors.  The company does not qualify for the Defensive Investor due to the current ratio not quite reaching the 2.0 requirement, the lack of dividend payments, and the high PEmg and PB ratios.  The Enterprising Investor is much more interested, as the company only fails the dividend requirement.  This investor type should feel very comfortable proceeding with further research to determine whether the company would be a good fit for their individual portfolios.  Such research should include a comparison against some of eBay’s competitors, perhaps starting with a review of ModernGraham’s valuation of Amazon (AMZN) and ModernGraham’s valuation of Google (GOOG).  From a valuation perspective, eBay has grown its EPSmg (normalized earnings) from $0.82 in 2008 to $2.07 in 2013.  This is a very strong level of growth that definitely supports the market’s implied estimate of 8.38% growth and the market price falls within the ModernGraham valuation model’s margin of safety.  As a result, the company appears to be fairly valued at the current time.

The Mediocre (Defensive or Enterprising and Overvalued)

  • United Parcel Service (UPS) - United Parcel Service intrigues the Enterprising Investor, but it would be much more interesting if there was stronger growth.  As it stands, the company is not suitable for the Defensive Investor because of its lack of sufficient earnings growth over the ten year period, its low current ratio, and its high PEmg and PB ratios.  The Enterprising Investor is interested, and should feel comfortable proceeding with further research into the company, beginning with a review of ModernGraham’s valuation of Fedex Corporation (FDX).  From a valuation perspective, the company has only grown its EPSmg (normalized earnings) from $2.52 in 2008 to an estimated $3.13 for 2013.  This level of growth is a little disappointing, and the ModernGraham valuation model does not return a value supportive of the market’s current price.  As a result, the company would appear to be overvalued at the present time.

 

  • Whole Foods Corp (WFM) - Whole Foods is an excellent company that must be on the watch list of all Enterprising Investors.  The company may not qualify for the Defensive Investor, due to a current ratio that isn’t quite high enough, a lack of a solid dividend history, and high PEmg and PB ratios, but the company passes the requirements of the Enterprising Investor with a perfect score.  Enterprising Investors wishing to follow Benjamin Graham’s value investing methods should pay close attention to Whole Foods while comparing it to other companies that pass the ModernGraham requirements.  From a valuation perspective, the company appears to be trading at a slight premium.  Growth has taken the company’s EPSmg (normalized earnings) from $0.50 in 2009 to $1.14 in 2013, a solid level of growth; however, the market is currently pricing the company at a level that surpasses the intrinsic value calculated by the ModernGraham valuation model.

The Bad (Speculative and Undervalued or Fairly Valued)

  • Weyerhaeuser Company (WY) - Weyerhaeuser Company intrigues me personally because of a life-long love of wood products and trees in general, but that alone is not a solid reason to invest.  The company currently does not pass the requirements of either the Defensive Investor or the Enterprising Investor, though it should be noted that the company will qualify for the Enterprising Investor next year if it demonstrates positive earnings in 2014.  The Defensive Investor does not like the company because of the lack of earnings stability or growth over the ten year period, and the high PEmg and PB ratios.  As a result, Enterprising Investors should keep the company on their watch lists as they review other opportunities by looking at companies that currently pass the ModernGraham requirements.  From strictly a valuation perspective, the company looks very attractive after growing EPSmg (normalized earnings) in the short term from -$1.02 in 2009 to an estimated $1.15 for 2013.  This level of growth is stronger than what the market is currently implying, and the ModernGraham valuation model indicates the company may be undervalued at the present time.

The Ugly (Speculative and Overvalued)

Mr. Market

  • Abbvie (ABBV) - Abbvie appears to be a company with prospects for becoming suitable for the Enterprising Investor in a few more years; however, at this time it is not suitable for either the Defensive Investor or the Enterprising Investor.  Intelligent Investors following the ModernGraham approach based on Benjamin Graham’s methods are very cautious investors, and choose to rely only on the most accurate data possible.  In this case, the majority of the earnings data invites the possibility of speculation because no one can determine exactly how Abbvie would have performed as a stand-alone company during the years it was actually a part of Abbott Labs.  As a result, the company fails the requirements for the Defensive Investor, who requires a ten year operating history, and the Enterprising Investor, who normally requires a five year operating history.  Therefore, Intelligent Investors should research other companies, such as those that pass the ModernGraham requirements.  From a valuation standpoint, it is impossible for the ModernGraham valuation model to present an accurate calculation of intrinsic value without having a longer history to determine the company’s demonstrated level of earnings growth; however, it should be noted that the market is implying a growth rate in earnings of 4.35%.  Individuals choosing to speculate on the company’s value can make estimations on their own about whether that growth rate is high or low.

 

  • Dominion Resources Inc. (D) - Dominion Resources, Inc. does not qualify for the Defensive Investor or the Enterprising Investor.  Like most utilities, it has a poor current ratio, so it must pass the remaining requirements for the Defensive Investor, but in this case the growth over the ten year period has been insufficient, the PEmg ratio is too high, and the PB ratio is too high.  As a result, value investors following the ModernGraham approach should research other companies that pass the ModernGraham requirements.  From a valuation standpoint, the company has seen its EPSmg (normalized earnings) drop from $2.93 in 2008 to an estimated $2.46 for 2013.  That lack of growth leads the ModernGraham valuation model to return an intrinsic value that is significantly lower than the market price today, and it should be noted that the market is currently implying a growth rate in earnings of over 9%.  The investor is then left to decide whether the dividend yield alone is worth the potential risk of capital loss, and that is a decision best left to individuals.

 

  • Goodyear Tire & Rubber (GT) - Goodyear does not qualify for either the Defensive Investor or the Enterprising Investor.  The company has a poor track record when it comes to earnings stability over the last 10 years, a critical requirement of the Defensive Investor that when combined with the company’s low current ratio, poor dividend history, and high PEmg and PB ratios, eliminates the company from the Defensive Investor’s list.  Similarly, the Enterprising Investor is put off by the high debt relative to current assets, and the lack of earnings stability over the last 5 years.  As a result, value investors seeking to follow Benjamin Graham’s methods may wish to seek other opportunities, such as by reviewing a list of companies that pass the ModernGraham requirements.  The company does fare well solely based on valuation, after growing its EPSmg (normalized earnings) from -$0.64 in 2009 to an estimated $0.86 for 2013.  This level of growth more than supports the market’s implied growth rate, and results in an intrinsic value that surpasses the price at which the company currently trades.  Therefore, the company appears undervalued.

 

  • Kimberly Clark Corp (KMB) - Kimberly Clark Corp has exhibited solid growth over the historical period, but it does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is not interested because the company’s current ratio is too low and the stock is trading at high PEmg and PB ratios.  The Enterprising Investor is turned away because the company’s debt levels are too high relative to its current assets.  The company as a whole, while a very good company that is likely to be around for a long time in the future, presents slightly more risk than value investors following Benjamin Graham’s methods are willing to accept.  As a result, those investors should investigate other potential investments such as through a review of companies that pass the ModernGraham requirements.  From strictly a valuation perspective, the company appears to be overvalued at the current time.  The company’s EPSmg (normalized earnings) have grown from $3.77 in 2008 to $4.73 in 2013, which is solid growth throughout the period, but the ModernGraham valuation model does not support the market price.

 

  • Williams Companies (WMB) - Williams Companies has one strong quality, and that is the high dividend yield.  However, Defensive Investors and Enterprising Investors will not be interested in the company as it does not pass their requirements.  The Defensive Investor will be off-put by the poor current ratio, lack of earnings stability over the ten year period, and high PEmg and PB ratios.  The company similarly fails the requirements of the Enterprising Investor because of the high debt relative to current assets, the lack of earnings stability over the five year period, and the lack of earnings growth over the five year period.  Therefore, value investors seeking to follow Benjamin Graham’s methods may wish to seek out other opportunities, such as by reviewing the ModernGraham valuation of Exxon Mobil (XOM).  From a valuation perspective, the company’s EPSmg (normalized earnings) have dropped from $1.32 in 2008 to an estimated $0.65 for 2013.  This lack of growth raises concerns over whether the company will be able to maintain growth in order to continue to grow its dividend over time, and whether the company presents an opportunity for capital gains on investment.  Due to the lack of growth, the ModernGraham valuation model returns a poor valuation that is nowhere near what the market price is currently.  As a result, the company would appear to be overvalued.

Disclaimer:  The author did not hold a position in any of the companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logos taken from the Wikipedia; this article is not affiliated with the companies in any manner.

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