10 Companies in the Spotlight This Week – 12/14/2013

We looked at 10 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)

• Apple Inc. (AAPL) - Apple Inc.’s earnings are just unbelievable, and the EPSmg (normalized earnings) have grown from $3.52 in 2008 to $33.18 in 2013.  That is astronomical growth, nearly doubling on average every year during the period.  Compare this to Microsoft (read the ModernGraham analysis here), a company whose earnings have been growing at a much slower pace and Intel (read the ModernGraham analysis here), another company that has grown much slower, and you will see why Apple’s growth is so special.  The company does not satisfy the Defensive Investor, however, by having a current ratio that is too low, a PB ratio that is too high, and a dividend history that is too short.  But from the eyes of the Enterprising Investor, this is a very attractive company, passing all of the Enterprising Investor’s requirements.  From a valuation perspective, the growth Apple has achieved is so high that the ModernGraham valuation model was forced to use its built in cap on a growth estimate.  After all, it would be foolish to assume that Apple will continue to grow at the pace it has over the last 10 years, but given the historical pace in earnings, it also seems that the market’s implied rate of 4.28% is significantly low and the company would appear to be undervalued.  As a result, Enterprising Investors should feel very comfortable in proceeding with further research into whether the company would be appropriate for their individual portfolios.

The Good (Defensive or Enterprising and Fairly Valued)

• Amgen, Inc. (AMGN) - Amgen Inc. is a solid company for the Enterprising Investor after passing all five of the requirements for the investor type.  The company fails to qualify for the Defensive Investor because of its lack of a dividend history, and because it currently is trading at high PEmg and PB ratios.  From a valuation perspective, the company has achieved strong and consistent growth, having taken EPSmg (normalized earnings) from $3.06 in 2008 to an estimated $5.54 for 2013.  This level of earnings growth supports the market’s implied estimate of 5.91%, and as a result the company would appear to be fairly valued.  Enterprising Investors should feel comfortable proceeding with further research into whether Amgen Inc. would be suitable for their individual portfolios, while Defensive Investors should keep the company on a watch list.
• Analog Devices, Inc. (ADI) - Analog Devices, Inc. is a solid company for the Enterprising Investor, having passed all five of the requirements.  The company does not qualify for the Defensive Investor because it currently trades at high PEmg and PB ratios, but Defensive Investors should keep the company on the watch list to see if those ratios improve sufficiently.  From a valuation perspective, the company has achieved a moderate level of growth, with EPSmg (normalized earnings) going from $1.53 in 2008 to $2.21 in 2013.  This is not a substantially high level of growth, but it does support the market’s implied estimate of 6.78%.  As a result, the company appears to be fairly valued at this time, and Enterprising Investors should feel comfortable proceeding with further research to determine whether the company is fit for their individual portfolios.
• B&G Foods Inc. (BGS) - B&G Foods Inc. is not a company for the Defensive Investor, after having passed only two of the seven requirements for the investor type.  The company isn’t large enough, does not have a long enough dividend history, the current ratio isn’t high enough, and the company is trading at high PEmg and PB ratios.  As a result, there is too much risk involved for the Defensive Investor; however, the Enterprising Investor is willing to take on a little more risk because he is able to do further research.  The company does pass enough of the requirements of the Enterprising Investor to qualify as a potential investment.  On the valuation side, the company has achieved significant growth in EPSmg (normalized earnings), from $0.37 in 2008 to an estimated $1.00 for 2013.  This growth would seem to support the current price and the company appears to be fairly valued.  Enterprising Investors should proceed with further research to determine if B&G Foods Inc. is suitable for their individual portfolios.

The Mediocre (Defensive or Enterprising and Overvalued)

• Abbott Laboratories (ABT) - Abbott Laboratories has strong financials, having passed every test of the Defensive Investor and Enterprising, except for the Defensive Investor’s requirement of a current ratio greater than 2.  This is a company that has displayed stable earnings growth, a strong dividend history, and is currently trading at fairly low PEmg and PB ratios.  Compare this to some similar companies such as Merck (MRK), Pfizer (PFE), and Johnson and Johnson (JNJ) and you will find Abbott Laboratories to be the strongest of the bunch.  However, from a valuation perspective the company appears to be overvalued at the current time.  While the EPSmg (normalized earnings) have grown from $2.27 in 2008 to an estimated $2.85 for 2013, that level of historical growth does not support the market’s implied rate of 2.27%.  However, if the company can achieve a growth rate of around 3%, the current price would be fair.  As a result, Defensive Investors and Enterprising Investors should keep a close eye on Abbott Laboratories to find a more opportunistic time to purchase.
• Adobe Systems Inc. (ADBE) - Adobe Systems Inc. disappoints the Enterprising Investor by having lackluster growth.  The company does not qualify for the Defensive Investor by not having a strong dividend history, and trading at very high PEmg and PB ratios.  The company does pass the requirements for the Enterprising Investor, but the company disappoints from a valuation perspective.  Adobe’s EPSmg (normalized earnings) have failed to substantially grow during the recent historical period, and in fact have dropped from $1.24 in 2008 to an estimated $1.22 for 2013.  Compared to similar companies such as Microsoft (MSFT), International Business Machines (IBM), and especially Apple (AAPL), it is surprising Adobe has not been able to achieve at least some growth.  This failure to grow earnings negatively affects the ModernGraham valuation model’s results for Adobe, and the company appears to be overvalued at the current time.  The market’s implied growth rate of 18.35% is in no way supported by the historical data, and Enterprising Investors should be very careful when considering this company for their individual portfolios.
• Tidewater Inc. (TDW) - Tidewater is a company that has had its earnings consistently fall over the recent historical period.  This is a company that once had outstanding valuations when its earnings were rising from 2004 to 2009, but since 2009 the EPSmg (normalized earnings) have steadily dropped.  It does appear that the earnings fall may be coming to an end, as the regular EPS have improved the last couple of years, and one would expect the ModernGraham valuation model to return a more attractive result in a year or two.  However, as it stands now the historical growth does not support the market’s implied rate of 5.25% and in fact the negative growth rate seen historically is enough to knock down the valuation from the model to $0.  As a result, any value from Tidewater at the current juncture is only justified by either the balance sheet or speculating; there is currently no basis in earnings for a positive value.  That said, the company does impress from the angle of the Defensive Investor and Enterprising Investor requirements, having qualifed as a Defensive Investor.  All investors should keep an eye on this company over the next couple years to determine if the valuation improves and if an opportunity for profit exists.
• Wolverine World Wide Inc. (WWW) – Wolverine World Wide Inc. intrigues the Enterprising Investor because of its stable earnings, dividend history and current ratio.  However, it is currently trading at a high PEmg ratio and a high PB ratio, causing it to not be suitable for the Defensive Investor.  From a valuation standpoint, the company’s growth has been a little uneven and does not support the market’s current implied estimate of 12.42%.  The ModernGraham valuation model estimates a growth rate closer to the 3-4% range, which would lead to an intrinsic value between $14 and $16.  Since the company is currently trading over $32/share, it would appear to be significantly overvalued.  As a result, Enterprising Investors should do considerably further research before deciding whether there is an opportunity for profit here.

The Bad (Speculative and Undervalued or Fairly Valued)

• Union Pacific Corporation (UNP) - Union Pacific Corporation is an interesting company in the sense that its earnings have displayed significant growth over the historical period, having grown EPSmg (normalized earnings) from $3.36 in 2008 to an estimated $7.65 for 2013.  This growth surpasses the market’s implied growth rate of 6.49%, leading the ModernGraham valuation model to return an undervalued determination for the company.  However, the PEmg and PB ratios are both too high for the Defensive Investor, and there is too much debt for the Enterprising Investor, so we’re left with a company that on one hand is undervalued based on its historical growth but is overvalued based on the PEmg and PB ratios.  As a result, there is just slightly too much risk for the Defensive Investor and Enterprising Investor at this time, but it certainly is a company to keep on the watch list.  Compare this to Norfolk Southern (NSC), which we recently reviewed and determined to be Defensive and undervalued.  Norfolk Southern had comparable growth in earnings but traded at a PEmg and PB ratios, thus would be a less risky investment.

The Ugly (Speculative and Overvalued)

• Automatic Data Processing (ADP) - Automatic Data Processing fails to qualify for either the Defensive Investor or the Enterprising Investor.  The company currently trades at a high PEmg ratio and a high PB ratio, but the most significant issue with the company is the level of current liabilities.  Presently, the company has more current liabilities than current assets, leading to disqualification from contention for the Enterprising Investor.  While many people claim that the current ratio is not as important today, the fact remains that a company with a strong current ratio is in a better financial position than a company with a poor current ratio.  As a result, a poor current ratio indicates increased risk, which Intelligent Investors seek to avoid when possible.  We are looking for low risk, high reward opportunities, so any increased level of risk makes us wary.  As for the valuation, the company has grown EPSmg (normalized earnings) from $2.20 in 2009 to an estimated $2.77 for 2014.  This is a very moderate level of growth, and in stark contrast to the 9.73% growth rate implied by the market at this time.  Consequently, the market’s price is not supported by historical earnings performance and the company appears to be overvalued.