Feature Screens

5 Undervalued Dow Components to Research – March 2015

image (9)There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five most undervalued Dow Components reviewed by ModernGraham which are suitable for the Defensive Investor or the Enterprising Investor according to the ModernGraham approach. This is a sample of the types of screens included in ModernGraham Stocks & Screens, which is available for premium subscribers.  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.

Be sure to check out the history of this screen, including the companies which have been chosen in the past.

Pfizer Inc. (PFE)

500px-Pfizer_logo_(modern).svgPfizer passes the initial requirements of both the Defensive Investor and the Enterprising Investor. In fact, the company receives a perfect score for both investor types, a rare accomplishment which indicates the company is in a very strong financial position. As a result, value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.24 in 2010 to an estimated $2.22 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of 2.95% over the next 7-10 years. In fact, the historical growth is around 15.75% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time. (See the full valuation on Seeking Alpha)

JP Morgan Chase (JPM)

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JPMorgan Chase passes all of the initial requirements of both the Defensive Investor and the Enterprising Investor, which is a rare accomplishment indicative of the company’s strong financial position. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $3.05 in 2010 to $4.82 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 2.13% over the next 7-10 years. In fact, the historical growth is around 11.64% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time. (See the full valuation on Seeking Alpha)

Chevron Corp (CVX)

500px-Chevron_Logo.svg

Chevron passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The only issue the Defensive Investor has with the company is the low current ratio. The Enterprising Investor is concerned with the level of debt relative to the current assets, but is willing to overlook those concerns since the company qualifies for the more conservative Defensive Investor. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, Chevron has grown its EPSmg (normalized earnings) from $8.58 in 2010 to $11.43 for 2014. This level of demonstrated growth is well above the market’s implied estimate for earnings growth of only 0.42% annually over the next 7-10 years. In fact, the historical growth is around 6.63% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

Intel Corp (INTC)

500px-Intel-logo.svg

Intel Corporation passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The only issue the Defensive Investor has with the company is the low current ratio, while the Enterprising Investor has no initial concerns. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, Intel Corporation has grown its EPSmg (normalized earnings) from $1.27 in 2010 to $2.15 for 2014. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 3.74% over the next 7-10 years. In fact, the historical growth is around 13.79% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

American Express Company (AXP)

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American Express Company passes the initial requirements of the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the high PB ratio while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $2.64 in 2010 to $4.71 for 2014. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 4.75% over the next 7-10 years. In fact, the historical growth is around 15.66% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

What do you think?  Are these companies a good value for Defensive 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.  Company logos were taken from Wikipedia; ModernGraham has no affiliation with any of the companies mentioned.

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