We looked at 10 different companies this week, each of which is a component of the Dow Jones Industrial Average. Here’s a summary of the ModernGraham Valuations. For more detailed analysis, click on the name of the company.
The Elite (Defensive or Enterprising and Undervalued)
- JP Morgan Chase (JPM) – JP Morgan Chase is a very intriguing financial company, based on its earnings growth over the last 10 years. The company passes all of the tests required for both the Defensive and Enterprising Investor because it has strong financials. From a valuation perspective, the company fares well in the ModernGraham valuation model after achieving significant growth in EPSmg (normalized earnings) of $2.62 in 2008 to an estimated $4.48 in 2013. The market is currently implying further growth of only 1.78%, which should be easily beatable by such a large bank. As a result, investors of all kinds should be interested in JP Morgan Chase and should do further research to determine whether it would be a suitable investment for them individually.
- UnitedHealth Group (UNH) – UnitedHealth is a very attractive company based on both its financials and its valuation. The company passes most of the tests of the Defensive Investor and the Enterprising Investor, with its only downside the poor current ratio. The company has a strong dividend history and stable earnings history. From a valuation standpoint, the company’s growth in EPSmg (normalized earnings) from $2.77 in 2008 to an estimated $4.93 for 2013 is impressive. As a result of this strong history of growth, the ModernGraham valuation model looks favorably upon UnitedHealth and the company appears to be undervalued. Investors should pay close attention to UnitedHealth and continue with further evaluation of the company when considering making an investment, while keeping in mind the 7 Key Tips to Value Investing.
The Good (Defensive or Enterprising and Fairly Valued)
- Microsoft Corp. (MSFT) – Microsoft is an intriguing and strong company that may be suitable for either the Defensive Investor or the Enterprising Investor. The company passes all of the preliminary requirements for these types of Intelligent Investors, with strong financials and stable earnings growth. Microsoft’s EPSmg (normalized earnings) have grown every year at least as far back as ModernGraham has tracked, which is 2003. From a valuation standpoint, the ModernGraham model estimates that the company is currently fairly valued by the market because the price is currently trading within the model’s margin of safety regarding the intrinsic value. Any Intelligent Investor considering purchasing shares of Microsoft should proceed with further research to determine whether the opportunity is right.
- Travelers Companies (TRV) – As a financial or insurance company, Travelers is subject to some minor changes to the initial requirements for Defensive or Enterprising Investors. The requirements utilizing the current assets and current liabilities have been eliminated in order to allow investors to use readily available information, and those items are not expressly listed in the balance sheets for financial and insurance companies. With that in mind, such a company must pass all of the requirements for either type of investor and Travelers does. As a result, Travelers may be suitable for either investor type to do further research.
The Mediocre (Defensive or Enterprising and Overvalued)
- Nike Inc. (NKE) – Nike is a company that has had good earnings growth over the years, but seems to be slightly overvalued by the market today. Even though the EPSmg (normalized earnings) have grown from $1.55 in 2009 to an estimated $2.61 for fiscal year 2014, the market is implying a growth rate of about 10.5%. This implied growth rate is actually right in line with what has been seen in EPSmg, but because of our margin of safety, an Intelligent Investor following Benjamin Graham’s principles will likely stay away from the company for now. In addition, the company is trading at a high PEmg and high PB ratio, making it unsuitable for Defensive Investors. It may be suitable for Enterprising Investors if the price drops below the margin of safety, but even so any investor should do further research before entering into any position.
- Pfizer Inc (PFE) – Pfizer is a strong company based solely on its balance sheet, but the earnings growth has not been strong enough for the Defensive Investor. Since 2008, the EPSmg (normalized earnings) has only grown from $1.25 to an estimated $1.37 for 2013. As a result of this lackluster growth, coupled with the fact the company is currently trading at a high PEmg ratio, the company is not suitable for Defensive Investors. However, the company does pass all of the requirements of the Enterprising Investor, whom is able to take on additional risk by doing substantially more research than his Defensive Investor counterpart. From a valuation standpoint, the ModernGraham valuation model indicates that the company is overvalued at the present time. Once again this comes back to the lack of earnings growth; if the company doesn’t grow its earnings, it will not be rewarded by the valuation model. The market is implying a growth rate of over 7% when EPSmg have grown at just over 2%. As a result, Pfizer may not be the best opportunity for investment at this time and any individual considering entering a position should do further research.
- Proctor & Gamble (PG) – Proctor and Gamble has a very poor current ratio, which is a key fundamental analysis ratio in the requirements for Benjamin Graham Intelligent Investors. For Defensive Investors, the current ratio combined with the high PEmg and PB ratios eliminates this company from potential investment. For Enterprising Investors, those who are able to take on higher risk through further research, the company still qualifies as a possibility due to stable earnings growth and a strong dividend. From a valuation standpoint, however, the company appears overvalued. While earnings have consistently grown from an EPSmg (normalized earnings) of $3.30 in 2009 to an estimated $3.83 for fiscal year 2014, that growth is only at an average of 2.26% per year. The market is implying a growth rate of 6.65%, well over what has been seen historically. As a result, any Enterprising Investor considering investing in Proctor & Gamble should do considerably more research to determine if it is a good time to invest in the company.
The Bad (Speculative and Undervalued or Fairly Valued)
- McDonald’s Corporation (MCD) – McDonald’s looks good when you consider the company only from a valuation perspective, after achieving earnings growth from an EPSmg (normalized earnings) of $2.62 in 2008 to an estimated $5.21 in 2013. However, the company’s financials are not strong enough for either the Defensive or Enterprising Investor because the company holds too much debt at this time. If McDonald’s could reduce the amount of debt on its books and improve its current ratio from a meager 1.24 to 1.5, then it would become much more attractive. As it stands, Intelligent Investors can only speculate as to the intrinsic value of the company and should do considerable further research before making any investment into McDonald’s.
The Ugly (Speculative and Overvalued)
- Merck & Co. (MRK) – Merck & Co. presents a rare scenario for the ModernGraham valuation model. The company’s earnings growth has been so atrocious over the historical period the model reviews that the projected growth is that the company will continue to shrink its earnings. In fact, the EPSmg (normalized earnings) in 2008 was $2.47, but the estimated EPSmg in 2013 is only $2.07. Historically, the EPSmg has shrunk every year since 2009. As a result, the model forecasts negative earnings growth and churns out a valuation of $0. Obviously, the company probably isn’t worthless, but the Intelligent Investor would probably shy away from Merck anyway, based on the facts that the company failed to fulfill the requirements of either the Defensive or Enterprising Investor due to the poor earnings growth and high PB and PEmg ratios.
- United Technologies Corp. (UTX) – United Technologies Corp. has had very stable earnings growth and in many respects is a very intriguing company, but it seems the market is overvaluing it at this time. In the preliminary assessment, the company does not have a very strong current ratio and is trading at a high PB ratio. These facts combined eliminate the company from contention for Defensive Investors and Enterprising Investors, and places it in our Speculative realm. From a valuation standpoint, the market is implying a growth rate that simply has not been accomplished by United Technologies Corp. The company has grown its EPSmg (normalized earnings) by an average of 4.94%, and while the market’s implied rate of 5.34% is not all that much higher than the average, it is still outside the margin of safety. As a result, any investor looking to enter a position in United Technologies Corp. should do considerably more research.