Stocks Value Investing Weekly

10 Companies in the Spotlight This Week – 12/21/13

bora bora beach sunsetWe 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)

  • Deere & Co. (DE) – Deere & Co. is a strong company and passes the requirements for both the Defensive Investor and the Enterprising Investor.  The only knocks on the company in that regard is that the PB ratio is a little high, but that is not enough to eliminate the company from further review by either investor type.  The ModernGraham valuation model also views Deere & Co. favorably, as a result of the strong growth the company has demonstrated over the historical period.  The company’s EPSmg (normalized earnings) have grown from $3.83 in 2008 to an estimated $6.86 for 2013.  This level of growth surpasses the market’s implied growth rate of only 2.1%, and as a result it would appear the company is undervalued at this time.  Defensive Investors and Enterprising Investors should take a look at our review of Caterpillar Inc. (ModernGraham Valuation) as they do further research to determine whether Deere & Co. would be suitable for their individual portfolios.
  • EMC Corp (EMC) – EMC Corporation is a very attractive company at the current moment.  The company does not qualify for the Defensive Investor, due to a current ratio that isn’t quite high enough, lack of a strong dividend history, and a high PEmg ratio.  However, the company does qualify for the Enterprising Investor after passing all five requirements for the investor type.  As a result, Enterprising Investors should proceed with further research, such as by reviewing the ModernGraham Valuation of International Business Machines (IBM).  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $0.61 in 2008 to an estimated $1.15 for 2013.  This is a solid level of growth that has been very consistent and is greater than the market’s current implied estimate for growth of 5.98%.  Therefore, it would appear that EMC Corporation is undervalued.
  • Medtronic, Inc. (MDT) – From a fundamentals side of things, Medtronic is an outstanding company.  In fact, the only requirement of either the Defensive Investor or the Enterprising Investor that the company does not fulfill is the requirement that the PB ratio be less than 2.5.  Every other requirement, from a strong dividend history to a strong current ratio, is fulfilled and the company is therefore suitable for either investor type.  From a valuation standpoint, the company is also very attractive and appears to be undervalued at the current time.  EPSmg (normalized earnings) have grown from $2.02 in 2009 to an estimated $3.38 for 2014, and while this is not a huge level of growth, it outpaces the market’s current implied estimate of 4.2%.  In addition, the earnings growth has been very consistent, rising by around thirty cents each year, which is a very nice thing to see (consistency is a key ingredient in successful investing).  Defensive Investors and Enterprising Investors should feel very comfortable continuing with further research, perhaps beginning with a review of ModernGraham’s Valuation of Johnson and Johnson.

The Good (Defensive or Enterprising and Fairly Valued)

  • Fedex Corp. (FDX) – Fedex Corporation is a company whose earnings have been a little unstable over the ten year historical period we’ve reviewed.  The company showed great growth during the first half of the period, then had a strong pull back from $6.48 in EPS for 2007 to $0.31 for 2009.  This drop can probably be attributed significantly to the recession, but it is noteworthy nonetheless.  In addition, the earnings issue has affected the company’s standing with Defensive Investors, as it has led the company to fail the Defensive Investor’s earnings growth requirement.  The company also fails the Defensive Investors requirements of low PEmg and PB ratios, and hence is not suitable for the Defensive Investor.  However, Enterprising Investors are more willing to take on risk than their Defensive Investor counterparts, and Fedex passes the Enterprising Investor’s requirements with flying colors.  From the valuation side of things, the market currently implies a growth rate of 7.93%, and that growth is supported by the recent trend in the earnings after the company has grown EPSmg (normalized earnings) from $3.45 in 2009 to an estimated $5.74 for 2014.  As a result, the company appears to be fairly valued and Enterprising Investors should feel comfortable proceeding with further research to determine if it is suitable for their individual portfolios.
  • Google (GOOG) – Google has displayed strong growth over the historical period we’ve reviewed, but the market seems to already account for that growth.  The company fails to fulfill the requirements of the Defensive Investor by not paying a dividend, and trading at high PEmg and PB ratios.  It does qualify for the Enterprising Investor, though, after passing every test other than the dividend payment requirement.  As a result, Enterprising Investors should move forward with further evaluation.  From a valuation perspective, as mentioned the market’s implied growth rate of 12.21% is close to what has been seen over the last number of years.  Google’s EPSmg (normalized earnings) have grown from $10.74 in 2008 to an estimated $32.23 for 2013.  This level of growth exceeds the market’s implied rate, but falls within a margin of safety and results in the ModernGraham valuation model indicating the price is within the fairly valued range.  Enterprising Investors should take a close look at Google to determine whether it fits within their individual portfolios, while taking a look at our recent reviews of Google’s main competitors, Microsoft (ModernGraham Valuation) and Apple (ModernGraham Valuation).
  • Infosys Technologies (INFY) – Infosys Technologies is an intriguing company that has exhibited consistent growth over the historical period.  The company qualifies for both the Defensive Investor and the Enterprising Investor, having only disappointed the Defensive Investor by having a high PB ratio.  Both investor types should feel comfortable continuing with further research, and should take a moment to review our valuations of IBM (ModernGraham Valuation) and Microsoft (ModernGraham Valuation).  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.77 in 2009 to an estimated $2.86 for 2014.  This level of growth is close to the 5.48% estimate implied by the market at the current time, and the company appears to be fairly valued.
  • Mastercard (MA) – Mastercard Inc. is a company that has demonstrated exceptional growth since the end of the financial crisis.  The company’s EPSmg (normalized earnings) have gone from $2.07 in 2008 to an estimated $20.12 for 2013.  However, the company does not qualify for the Defensive Investor because it does not have the earnings stability or dividend history the investor type requires, and is trading at high PEmg and PB ratios.  The company does qualify for the Enterprising Investor, who is willing to take on more risk than the Defensive Investor through completing further research, as the company passes all five of the requirements of Enterprising Investors.  From a valuation standpoint, the market is currently implying a growth estimate of 15.76%, and while that is above our upper limit for growth, that is still supported by the demonstrated historical earnings growth.  As a result, the company would appear to be fairly valued and Enterprising Investors should feel comfortable taking further steps in research, such as reviewing the ModernGraham Valuation of Visa.

The Mediocre (Defensive or Enterprising and Overvalued)

  • No companies reviewed this week fall into The Mediocre category.

The Bad (Speculative and Undervalued or Fairly Valued)

  • No companies reviewed this week fall into The Bad category.

The Ugly (Speculative and Overvalued)Mr. Market

  • Bristol-Myers Squibb Co. (BMY) – Bristol-Myers Squibb Co. has displayed stable earnings and dividends, but does not currently qualify for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company does not have a high enough current ratio and trades at high PEmg and PB ratios.  For the Enterprising Investor, the current ratio is too low and there is too much debt.  As a result, both investor types should do considerably further research, including reviewing our recent reviews of Pfizer (ModernGraham Valuation) and Merck (ModernGraham Valuation) and probably wait until a better opportunity arises before adding Bristol-Myers Squibb to their individual portfolios.  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.16 in 2008 to an estimated $1.67 for 2013.  This growth has been fairly consistent until recently, with EPSmg dropping slightly in 2012 and again for 2013.  The market’s implied growth rate is over 10%, which is well above what has been shown historically, and therefore the company appears to be overvalued at this time.
  • Emerson Electric Co. (EMR) – Emerson Electric Co. is a stable company, but does not appear to have much opportunity for value investors to profit at this time.  The company does not qualify for either the Defensive Investor or the Enterprising Investor as it has too much current liabilities for either investor type and is currently trading at high PEmg and PB ratios.  Investors should be very thorough when doing further research if they are considering investing in Emerson at this time.  One suggestion for further research would be to review the ModernGraham Valuation of General Electric (GE) and the ModernGraham Valuation of Dover Corporation (DOV).  As far as the valuation, Emerson Electric has not had a lot of growth, having brought EPSmg from $2.52 in 2008 to $2.78 for 2013.  The market is currently implying a growth rate of 7.73%, which is well above what has been seen historically and would indicate the company is overvalued at this time.
  • Public Storage (PSA) – Public Storage is a company that fails to satisfy either the Defensive Investor or the Enterprising Investor because of its low level of current assets.  The ModernGraham system puts a high emphasis on the current ratio, and Public Storage’s balance sheet is largely based on its real estate holdings (which is true for most REITs).  It is possible for a REIT to pass the requirements of the Defensive Investor by passing all of the requirements not dealing with the current ratio, but in this case Public Storage is trading at high PEmg and PB ratios, and therefore is not suitable for the Defensive Investor.  The Enterprising Investor is completely turned off by the level of debt relative to the current assets.  As a result, investors should keep the company on a watch list to see if the PEmg and PB ratios improve.  With regard to the valuation, the market is implying a growth rate of 14.64%, which is not supported by the historical level of growth.  Public Storage has displayed a significant amount of growth, but nowhere near the market’s implied estimate and the company would appear to be overvalued at the current time.

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