5 Low PEmg Companies for the Defensive Investor

image (6)There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected five of the lowest PEmg (price / normalized earnings) companies reviewed by ModernGraham. Each company has been determined to be suitable for the Defensive Investor according to the ModernGraham approach. This is a sample of one screen that is included in ModernGraham Stocks & Screens, our monthly publication.  Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk. Defensive Investors may also be interested in reviewing 5 Undervalued Companies for the Defensive Investor – January 2014 while also conducting further research into the following companies.

Chevron Corporation (CVX)

500px-Chevron_Logo.svgChevron passes almost all of the tests for both the defensive and enterprising intelligent investors, with the sole exception being that its current ratio is not quite strong enough for the defensive investor.  As a result, Chevron deserves more thorough research from potential investors.  From a valuation perspective, it also appears the company may be undervalued due to very high earnings growth over the last few years that may not be adequately reflected by the market.  The market is currently implying a growth rate estimate of only 0.65%, but the historical growth is much higher after the company’s EPSmg (normalized earnings) have risen from $8.10 in 2009 to an estimated $11.69 for 2013.  As a result, the ModernGraham valuation model returns an estimate of intrinsic value that is well above the market’s current price.
CVX Chart

CVX data by YCharts

Ensco PLC (ESV)

ENSCO_LogoEnsco is an intriguing company for Defensive Investors and Enterprising Investors, and should be kept on their watch lists.  The Defensive Investor’s only gripe with the company is that the current ratio is a little lower than what he would like to see, and the company qualifies for the Enterprising Investor because it also qualifies for the Defensive Investor.  These value investors seeking to utilize Benjamin Graham’s methods should keep an eye on Ensco while researching other companies that pass the ModernGraham requirements.  From a valuation perspective, the company doesn’t appear like a great value opportunity at the current time, though the PEmg ratio is very low (hence its inclusion in this list).  EPSmg (normalized earnings) have dropped from $6.13 in 2009 to an estimated $4.90 for 2013.  Meanwhile, the market is implying a growth rate of 1.05%, but since the historical performance has shown a drop in earnings, the market’s estimate is not supported by the historical data.  Until the growth in earnings improves, this company may be overvalued but should definitely be kept in watch lists.
ESV Chart

ESV data by YCharts

AFLAC Incorporated (AFL)

500px-Aflac.svgAFLAC is a very attractive company, passing all of the requirements for both the Defensive Investor and the Enterprising Investor.  The company has a strong balance sheet, good dividend history, and solid earnings growth.  Defensive Investors and Enterprising Investors should feel very comfortable continuing with their research into the company.  From a valuation standpoint, the strong earnings growth from an EPSmg (normalized earnings) of $2.91 in 2008 to an estimated $5.56 in 2013.  Such growth far outpaces the 1.41% the market is implying.  The company appears significantly undervalued by the ModernGraham valuation model.  Defensive Investors and Enterprising Investors should undertake further research to determine if the company would be suitable for their individual investment portfolios, while keeping in mind the 7 Key Tips to Value Investing.
AFL Chart

AFL data by YCharts

Exxon Mobil Company (XOM)

500px-Exxon_Mobil_Logo.svgExxon Mobil is a very attractive company at its current price, and has strong financials that pass the tests for Defensive Investors, except for the low current ratio.  Since the company is suitable for the Defensive Investor, it is also suitable for the Enterprising Investor by default despite its high level of debt relative to its current assets.  The company’s earnings growth has been a little uneven from year to year, but the normalized earnings definitely are showing growth after going from $6.42 in 2009 to an estimated $8.02 for 2013.  Meanwhile, the market is currently implying a growth rate estimate of only 1.7%.  As a result, the ModernGraham valuation model indicates the company may be slightly undervalued.  Investors should take the time to look further at Exxon Mobil to determine if it fits the needs of individual portfolios, but overall it appears there is an opportunity here.
XOM Chart

XOM data by YCharts

Intel Corporation (INTC)

500px-Intel-logo.svgIntel Corp. fares extremely well in the ModernGraham requirements, passing every test of both the Defensive Investor and the Enterprising Investor.  This is a company that appears to present low risk of financial strife and may present relative safety of principal.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the opportunity.  An example of further research would be to look into some competitors, such as by a review of ModernGraham’s valuation of Hewlett-Packard Company (HPQ) and ModernGraham’s valuation of Texas Instruments (TXN).  From a valuation standpoint, the company looks very strong, having grown its EPSmg (normalized earnings) from $0.95 in 2009 to $2.00 for 2013.  This level of growth easily supports the market’s implied estimate for growth of 1.94%, and the ModernGraham valuation model returns an intrinsic value that exceeds the current market price.  Therefore, the company appears to be undervalued at the current time.

INTC Chart

INTC data by YCharts

What do you think?  Are these companies a good value for Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

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

Get a free copy of ModernGraham Stocks & Screens: March 2014 by signing up for our free daily email list! Sign up now and make sure you don't miss any valuations.

Leave a Reply

Your email address will not be published. Required fields are marked *