Feature Value Investing Weekly

16 Companies in the Spotlight This Week – 3/8/14

image (7)We looked at 16 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)

  • 500px-Aflac.svgAflac Inc. (AFL) – Aflac is suitable for either the Defensive Investor or the Enterprising Investor, having passed all of the requirements of each investor type.  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 company.  Such research may include a review of ModernGraham’s valuation of Unum Group (UNM) or 5 Low PEmg Companies for the Defensive Investor.  From a valuation perspective, the company appears strong, having grown its EPSmg (normalized earnings) from $3.01 in 2009 to $5.59 for 2013.  This is a level of demonstrated historical growth that significantly outpaces the market’s current implied estimate of only 1.57% earnings growth.  The ModernGraham valuation model accordingly returns an estimate of intrinsic value that is well above a margin of safety when compared to the market price.

The Good (Defensive or Enterprising and Fairly Valued)

  • Exxon Mobil Corporation (XOM) – Exxon Mobil Corporation is suitable for the Defensive Investor after having passed every one of the investor type’s requirements except for the current ratio.  The company is then also suitable for the Enterprising Investor by default, despite having a high level of debt relative to the company’s current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and the potential investment opportunity.  This research should also include a review of ModernGraham’s valuation of Chevron Corporation (CVX) and a list of 5 Undervalued Companies for the Defensive Investor.  From a valuation perspective, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $6.39 in 2009 to $7.82 for 2013.  This level of growth supports the market’s current implied estimate of earnings growth of 1.9%, leading the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety when compared to the current price.

 

  • Norfolk Southern Corporation (NSC) – Norfolk Southern Corporation is suitable for the Defensive Investor, having passed every requirement of the investor type except for the current ratio requirement.  The company is also suitable for the Enterprising Investor by default since it qualifies for Defensive Investors, despite having a higher level of debt relative to current assets than the Enterprising Investor typically likes to see.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company.  One example of further research may be to compare the company to a competitor such as through a review of ModernGraham’s valuation of Union Pacific Corp (UNP).  From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $3.56 in 2009 to $5.29 for 2013.  This is a solid level of historically demonstrated growth that surpasses the market’s current implied estimate for earnings growth of 4.63%, and the ModernGraham valuation model returns an estimate of intrinsic value that is greater than the market price, indicating the company may be undervalued presently.

 

  • Teradata Corporation (TDC) – Teradata Corporation appears suitable for the Enterprising Investor but not the Defensive Investor due to the lack of dividend payments and the high PEmg and PB ratios.  The Enterprising Investor’s only concern is the lack of dividend payments, which is not enough of a concern by itself to eliminate the company from potential investment.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.  Such research should include comparison to other opportunities such as through a review of ModernGraham’s valuation of International Business Machines (IBM) and ModernGraham’s valuation of Oracle (ORCL).  From a valuation perspective, the company appears fairly valued, having grown its EPSmg (normalized earnings) from $1.29 in 2009 to $2.15 for 2013.  This is a solid level of growth that supports the market’s implied estimate of earnings growth in the amount of 6.43%, leading the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety in relation to the price.

 

  • Urban Outfitters Inc. (URBN) – Urban Outfitters Inc. appears suitable for the Enterprising Investor but not the Defensive Investor, due to the lack of dividend payments and high PEmg and PB ratios.  The Enterprising Investor is not quite as strict as the Defensive Investor, due to the Enterprising Investor’s willingness to undergo extensive analysis, and the only initial drawback of the company for the Enterprising Investor is the lack of dividend payments.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable conducting further research into this company, including a review into other opportunities such as by reading ModernGraham’s valuation of The Gap Inc. (GPS) and a list of 5 Low PEmg Companies for the Enterprising Investor.  From a valuation perspective, the company appears to be fairly valued at the present time.  The company has grown its EPSmg (normalized earnings) from $1.07 in 2010 to an estimated $1.58 for 2014, a level of growth that supports the market’s implied estimate of earnings growth of 7.61%.  The ModernGraham valuation model accordingly returns an estimate of intrinsic value that falls within a safety margin in relation to the current price.

 

  • VF Corporation (VFC) – VF Corporation is suitable for the Enterprising Investor but not the Defensive Investor, due to the high PEmg and PB ratios.  The company passes all of the requirements of the Enterprising Investor, and that investor type should feel comfortable proceeding with further research into to the company.  Such research should also include a review of other opportunities, such as through a review of ModernGraham’s valuation of Nike Inc. (NKE).  From a valuation standpoint, the company appears fairly valued after growing its EPSmg (normalized earnings) from $1.21 in 2009 to $2.19 for 2013.  This is a level of demonstrated historical growth that supports the market’s implied estimate for earnings growth of 9.11%, and the ModernGraham valuation model returns an intrinsic value estimate that falls within a margin of safety in relation to the price.

 

  • Waters Corporation (WAT) – Waters Corporation is not suitable for the Defensive Investor because it does not pay a dividend and is currently trading at high PEmg and PB ratios.  The Enterprising Investor is willing to overlook the lack of a dividend payment, however, because the company passes all of the investor type’s other requirements.  As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.  further research should also include a review of other opportunities.  As for a valuation, the company has grown its EPSmg (normalized earnings) from $2.89 in 2009 to $4.82, an impressive level of demonstrated historical growth that supports the market’s implied estimate of earnings growth of 7.43%.  Accordingly, the ModernGraham valuation model returns an estimate of intrinsic value that is within a margin of safety relative to the market price, and the company appears to be fairly valued.

 

  • Xcel Energy Inc. (XEL) – Xcel Energy Inc. is a very intriguing utility company, having passed every requirement of the Defensive Investor except the current ratio requirement. It also qualifies for the Enterprising Investor by default because it is suitable for Defensive Investors, despite having a level of debt relative to its current assets that normally turns Enterprising Investors away.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable researching the company further.  From a valuation perspective, the company appears to be fairly valued, having grown its EPSmg (normalized earnings) from $1.42 in 2009 to $1.79 in 2013.  This level of historically demonstrated growth supports the market’s implied estimate of earnings growth of 4.15%, leading the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the market price.

The Mediocre (Defensive or Enterprising and Overvalued)

  • Garmin Ltd. (GRMN) – Garmin is a strong company suitable for Defensive Investors and Enterprising Investors, but it doesn’t have a strong valuation at this time.  The company only fails the Defensive Investor’s PB ratio requirement, and the Enterprising Investor’s earnings growth over 5 years requirement.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable researching the company further and certainly keeping it on a watch list going forward.  As for the valuation, the company has seen a slight drop in EPSmg (normalized earnings) over the last 5 years, from $3.28 in 2009 to $2.94 for 2013.  This historical performance does not support the market’s implied estimate for earnings growth of 5.03%, and leads the ModernGraham valuation model to return an estimate of intrinsic value that trails the market price, indicating the company may be overvalued at the current time.  If the earnings improve significantly in 2014, and return the company to growth, then the valuation may improve.

 

  • General Electric (GE) – General Electric appears suitable for either the Defensive Investor or the Enterprising Investor; however, the lack of earnings growth is a serious concern for either investor type.  The Defensive Investor is disappointed in the insufficient earnings growth over the ten year historical period and the Enterprising Investor is frustrated by the lack of growth over even a five year historical period.  Both investor types should keep the company on their watch lists.  From a valuation perspective, the lack of earnings growth plays a big factor.  The company has seen a drop in EPSmg (normalized earnings) from $1.64 in 2009 to $1.33 for 2013.  Until the earnings improve, the company’s historical performance does not support the market’s implied growth estimate of 5.33%.  As a result, the ModernGraham valuation model returns an estimate of intrinsic value that is below the current price, indicating the company is overvalued.

 

  • Halliburton Company (HAL) – Halliburton is suitable for the Enterprising Investor but not the Defensive Investor, due to high PEmg and PB ratios.  The company passes all of the requirements of the Enterprising Investor.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.  That research could include a review of ModernGraham’s valuation of Schlumberger Limited (SLB).  From a valuation perspective, the company has risen its EPSmg (normalized earnings) from $1.98 in 2009 to $2.52 for 2013, a level of demonstrated historical growth that does not provide enough support for the market’s current implied estimate of earnings growth of 7.05%.  The low earnings growth results in the ModernGraham valuation model providing an estimate of intrinsic value that is below the market’s current price, indicating the company may be overvalued currently.

 

  • Regal-Beloit Corp (RBC) – Regal-Beloit Corporation is suitable for either the Defensive Investor or Enterprising Investor.  The only test for either investor type that the company did not pass was the Defensive Investor’s PEmg requirement.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research, including a review of 5 Outstanding Dow Components.  From a valuation standpoint, the company does not fare as well after poor growth in EPSmg (normalized earnings) from $3.19 in 2009 to $3.57 for 2013.  This low level of historically demonstrated growth does not support the market’s current implied estimate of growth of 6.42%, leading the ModernGraham valuation model to return an estimate of intrinsic value that trails the current price.

 

The Bad (Speculative and Undervalued or Fairly Valued)

  • Coca-Cola Company (KO) – Coca-Cola is a difficult company for value investors because it is so famous for being one of Warren Buffett’s favorite investments, but the fact is that Buffett has moved away from Benjamin Graham’s teachings most likely because Buffett is able to exert significant pressure on management.  As Coke looks today, it does not appear suitable for either the Defensive Investor or the Enterprising Investor.  The company’s current ratio is too low and the company’s PB ratio is far too high for the Defensive Investor, and the company holds too much debt relative to its current assets for the Enterprising Investor.  Value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation perspective, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.29 in 2009 to $1.96.  This level of growth supports the market’s implied estimate for earnings growth of 5.48%, leading the ModernGraham valuation model to return an estimate of intrinsic value that is within a margin of safety as the price.

The Ugly (Speculative and Overvalued)

Mr. Market

  • Host Hotels & Resorts (HST) – Host Hotels and Resorts is a better than average REIT, but still does not qualify for either the Defensive Investor or the Enterprising Investor.  The company’s poor earnings stability, lack of earnings growth, and high PEmg ratio are all disqualifying factors.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation perspective, the earnings situation severely impacts the ModernGraham valuation model’s view of the company.  The company’s EPSmg (normalized earnings) have gone from $0.34 in 2009 to $0.04 for 2013, and at the $0.04 level, the PEmg is through the roof.  As a result, the ModernGraham valuation model indicates the company may be overvalued presently.

 

  • Verizon Communications (VZ) – Verizon Communications is not suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company has not shown sufficient earnings growth over the ten year historical period, and is trading at too high PEmg and PB ratios.  For the Enterprising Investor, the company has too much debt relative to its current assets and has not grown its EPSmg (normalized earnings) over the five year historical period.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation perspective, the company does not fare well, after seeing EPSmg fall from $1.84 in 2009 to $1.79 in 2013.  This demonstrated lack of earnings growth does not support the market’s implied growth rate estimate of 8.95%, and the ModernGraham valuation model returns an intrinsic value estimate that is significantly below the market price.

 

  • Yum Brands Inc. (YUM) – Yum Brands does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is turned away by the low current ratio, and the high PEmg and PB ratios.  The Enterprising Investor does not like the high level of debt relative to the company’s current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation perspective, the company appears overvalued.  The company’s EPSmg (normalized earnings) have only grown from $1.88 in 2009 to $2.70 for 2013.  This low level of historically demonstrated growth does not support the market’s implied estimate for earnings growth of 10.05%, and the ModernGraham valuation model estimates an intrinsic value that is well below the market price.

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 either the company website or Wikipedia; this article is not affiliated with the companies in any manner.

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