Feature Screens

5 Undervalued Companies for the Enterprising Investor – April 2014

image (5)There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five most undervalued companies reviewed by ModernGraham. Each company has been determined to be suitable for the Enterprising Investor according to the ModernGraham approach. This is a sample of one screen that is included in ModernGraham Stocks & Screens.  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. Each company suitable for the Defensive Investor is also suitable for Enterprising Investors, so Enterprising Investors may also be interested in reviewing 5 Undervalued Companies for the Defensive Investor – April 2014 while also conducting further research into the following companies.

 

Ford Motor Company (F)

500px-Ford_Motor_Company_Logo.svgFord Motor Company remains unsuitable for the Defensive Investor due to its lack of stability in earnings and dividends over the ten year period.  The Enterprising Investor looks at a much shorter time horizon, though, and the company passes all of the requirements of this investor type.  As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods will feel comfortable proceeding with further research.  As for a valuation, the company performs well in the ModernGraham valuation model after growing its EPSmg (normalized earnings) from -$3.60 in 2008 to $2.23 for 2013.  This solid level of growth is not reflected by the market, as the market is currently implying a growth rate estimate of -0.66%.  In other words, the market price indicates an expectation that the company’s EPSmg will shrink by 0.66% annually over the next 7-10 years.  Clearly this assumption is not supported by the historical achievements of the company, and the ModernGraham valuation model accordingly returns an intrinsic value estimate that exceeds the market price.  (Read the full valuation here)

F Chart

F data by YCharts

Freeport-McMoRan Copper & Gold Inc. (FCX)

500px-Freeport_McMoRan.svgFreePort-McMoran is an interesting company in the ModernGraham valuation model.  It does not pass the requirements of the Defensive Investor, as it has not consistently paid dividends over the last ten years, and it has not shown earnings stability over the last ten years.  But it does pass the requirements of the Enterprising Investor, though it has a higher level of debt relative to current assets than the investor type likes to see.  As a result, Enterprising Investors should feel comfortable proceeding with their research, beginning with a review of a Glance at the Dow and 5 Low PEmg Companies for the Enterprising Investor.  From a valuation perspective, the ModernGraham valuation is affected significantly by the large earnings loss in 2008, which has caused the EPSmg (normalized earnings) figure for 2009 to be very low in relation to 2013.  As it stands, the EPSmg have grown from -$1.67 to $3.48, indicating a high level of growth that would appear to significantly outpace the market’s implied estimate of 0.49% earnings growth.  This has led the model to return an intrinsic value estimate that is well above the market price, and the overall result that the company is undervalued is supported by the valuation based on only 3% growth. (Read the full valuation here)

FCX Chart

FCX data by YCharts

Capital One Financial (COF)

500px-Capital_One_Financial_logo.svgCapital One Financial is a great company for Enterprising Investors to look at in more detail, but it does not quite qualify for the Defensive Investor because it has not shown sufficient growth in its earnings over the ten year historical period.  That said, 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 very comfortable proceeding with further research into the company and comparing it to competitors through a review of ModernGraham’s valuation of JP Morgan Chase (JPM) and ModernGraham’s valuation of Wells Fargo Inc. (WFC).  From a valuation side of things, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from $3.14 in 2009 to $6.56 for 2013.  This solid level of demonstrated growth surpasses the market’s implied estimate of 1.46% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.  (Read the full valuation here)

COF Chart

COF data by YCharts

Apple Inc. (AAPL)

500px-Apple_logo_black.svgApple Inc. is an excellent company for Enterprising Investors, having failed only the investor type’s current ratio requirement.  The company does not qualify for the Defensive Investor due to its low current ratio, lack of a long enough dividend record, and high PB ratio.  As a result, Enterprising Investors should feel very comfortable proceeding with further research into the company and its competitors, including a review of ModernGraham’s valuation of Microsoft (MSFT) and ModernGraham’s valuation of Google (GOOG).  As for a valuation, the company appears to be significantly undervalued.  Apple has grown its EPSmg (normalized earnings) from $9.22 to an estimated $37.86 for 2014, a growth rate that far outpaces the market’s implied estimate of only 2.68% earnings growth.  The ModernGraham valuation model has accordingly returned an estimate of intrinsic value that is much higher than the market price.  (Read the full valuation here)

AAPL Chart

AAPL data by YCharts

Gannett Co., Inc. (GCI)

500px-Gannett_logo_2011.svgGannett is an intriguing company for Enterprising Investors, after having passed every requirement of the investor type except the debt to current assets requirement.  The company does not qualify for Defensive Investors, however, because of the current ratio being too low, and the lack of earnings stability or sufficient growth over the ten year period.  As a result, Enterprising Investors should feel very comfortable proceeding with further research to determine if Gannett is suitable for their individual portfolios, keeping in mind the 7 Key Tips to Value Investing.  From purely a valuation standpoint, the company appears undervalued, after growing EPSmg (normalized earnings) from -$6.63 in 2008 to an estimated $1.93 for 2013.  This level of growth significantly outpaces the market’s current implied estimate of growth (2.71%), and the ModernGraham valuation model indicates a value around $74.  (Read the full valuation here)
GCI Chart

GCI 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 held a position in Ford Motor Company (F) and Apple Inc. (AAPL), but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing those holdings within the next 72 hours.

Leave a Reply

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

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back To Top