Feature Stocks Value Investing Weekly

14 Companies in the Spotlight This Week – 1/4/14

bora bora beach sunsetWe looked at 14 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)

  • Agilent Technologies Inc. (A) – Agilent Technologies Inc. is a company that seems to have turned the corner from a poor year during the recession to have some positive potential for the future.  The company is not suitable for the Defensive Investor because of its lack of a long dividend history, lack of stable earnings, and high PEmg and PB ratios.  However, it is suitable for the Enterprising Investor after only failing the requirement that it have a positive earnings for at least 5 years.  Enterprising Investors should feel comfortable continuing with further research, including a review of the ModernGraham valuation of General Electric.  From a valuation side of things, the company’s EPSmg (normalized earnings) grew from $1.24 in 2009 to $2.39 for 2013.  This level of growth outpaces the market’s implied estimate of 7.72%, and as a result the company appears to be undervalued at the current time.
  • Coach Inc. (COH) – Coach Inc. is a very strong company, with healthy financials and a very consistent and promising level of growth in earnings.  The company is not suitable for the Defensive Investor, having failed the PB ratio and Dividend Record requirements.  The company passes all of the requirements of the Enterprising Investor, and that investor type should feel comfortable proceeding with further research, beginning with a review of some Defensive Investor companies.  From a valuation standpoint, the company has grown its EPSmg (normalized earnings) from $1.79 in 2009 to an estimated $3.33 for 2014.  The market implies a growth rate of 4.23%, a rate which is easily supported by the earnings history.  As a result, the company appears to be undervalued at the current time and there may be an opportunity for profit.
  • Motorola Solutions Inc. (MSI) – Motorola Solutions Inc. presents an interesting scenario.  The company is far from suitable for the Defensive Investor type, defined as investors that seek to have the least possible amount of risk, but is suitable for the Enterprising Investor despite failing the earnings stability requirement.  Defensive Investors should look for other opportunities, perhaps by reviewing the ModernGraham Valuation of Cisco, because Motorola’s lack of earnings stability or growth (the Defensive Investor looks at a ten year period to determine whether earnings have grown sufficiently), its lack of consistent dividend payments, and its high PEmg and PB ratios.  Enterprising Investors should feel comfortable proceeding with further research into whether Motorola would be suitable in their individual portfolios.  From a valuation side of things, the company has grown its EPSmg (normalized earnings) from -$1.61 in 2009 to an estimated $2.72 for 2013.  That’s quite a turnaround, and more than supports the market’s implied estimate of 8.14% growth.  As a result, the company would appear to be undervalued at the current time.
  • Qualcomm Inc. (QCOM) – Qualcomm Inc. is a very attractive company at a great price.  The company nearly qualifies for the Defensive Investor, but fails due to a high PEmg ratio and a high PB ratio.  However, the company passes all of the five requirements of the Enterprising Investor due in large part to its excellent financial position and its strong earnings history.  Enterprising Investors should feel comfortable proceeding with further research, beginning with a review of the ModernGraham Valuation of Intel Corporation (INTC).  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.68 in 2008 to $2.98 in 2013.  This proven level of growth easily supports the market’s implied growth rate of 8.12% and the company would therefore appear to be undervalued at the current time.

The Good (Defensive or Enterprising and Fairly Valued)

  • Raytheon Company (RTN) – Raytheon Company is a strong possibility for the Enterprising Investor.  The company does not pass enough requirements in order to be suitable for the Defensive Investor, by not having a strong enough current ratio and trading at a high PB ratio.  However, it is suitable for the Enterprising Investor, as the current ratio is strong enough for that investor type, and the company has a good earnings history and dividend history.  As a result, Enterprising Investors should feel comfortable proceeding with further research, beginning with a review of ModernGraham’s valuation of Boeing.  From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $3.17 in 2008 to an estimated $5.44 for 2013.  This level of demonstrated growth supports the market’s implied growth estimate of 4.09%.  The ModernGraham valuation model returns an intrinsic value of around $110, which is higher than the market’s current price; however, the price is still within the safety margin and would appear to be fair value.

The Mediocre (Defensive or Enterprising and Overvalued)

  • Schlumberger Ltd. (SLB) – Schlumberger Ltd. has achieved moderate growth and may be suitable for the Enterprising Investor.  For the Defensive Investor, the company fails to qualify due to a current ratio that is not quite strong enough and because it is trading at high PEmg and PB ratios.  However, the company passes all of the requirements of the Enterprising Investor, and investors following that strategy should feel comfortable proceeding with further research beginning with a review of other Enterprising Investor companies.  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $3.49 in 2008 to an estimated $4.10 for 2013.  The market is currently implying a growth rate of 6.71%, a rate that is higher than the historical growth can support.  As a result, the company would appear to be overvalued at the current time.
  • Sysco Corp (SYY) – Sysco Corp is a very intriguing company to the Enterprising Investor, but not the Defensive Investor.  The company’s lack of earnings growth over the ten year period along with its high PEmg and PB ratios and its low current ratio disqualify it from suitability for the Defensive Investor.  The Enterprising Investor’s requirements are all satisfied, however, so that investor type should feel comfortable proceeding with further research.  From a valuation standpoint, the company has not had sufficient growth in its earnings, with EPSmg (normalized earnings) only growing from $1.67 in 2009 to an estimated $1.80 for 2014.  The market is currently implying a growth rate of 5.83%, which is higher than the historical performance supports.  As a result, the company appears to be overvalued.

The Bad (Speculative and Undervalued or Fairly Valued)

  • Amerisource Bergen Corp (ABC) – Amerisource Bergen Corp. is a company that has potential but doesn’t quite qualify for Intelligent Investors following Benjamin Graham’s methods.  The company does not qualify for the Defensive Investor because of its poor current ratio and high PEmg ratio, and fails to qualify for the Enterprising Investor because of its high level of current liabilities.  If the company could lessen its current liabilities significantly and improve its current ratio, the company would become attractive to value investors.  As it stands, investors may find better opportunities elsewhere.  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.22 in 2008 to $2.35 for 2013.  This level of growth supports the market’s implied estimate of 10.6%, which indicates the company may be fairly valued at the current time.
  • Xerox Corporation (XRX) – Xerox Corporation has relatively stagnant earnings and does not pass the requirements for either the Defensive Investor or the Enterprising Investor.  The company is not suitable for the Defensive Investor because of its poor current ratio, lack of a consistent dividend history over the ten year historical period, and its failure to grow earnings adequately over the ten year period.  For the Enterprising Investor, the high level of debt relative to the company’s current assets is the determining factor.  Either type of investor may be better suited looking through some of the Defensive and Enterprising companies ModernGraham has found to pass the requirements.  As for a valuation, the company has not shown significant growth in its EPSmg (normalized earnings), however the market is only implying a growth rate of 3.03%, which is supported by the historical performance.  As a result, the company appears to be fairly valued at the current time.

The Ugly (Speculative and Overvalued)

Mr. Market

  • AGL Resources Inc. (GAS) – AGL Resources Inc. does not qualify for either the Defensive Investor or the Enterprising Investor, due in part to its large level of debt relative to its current assets, but also as a result of its poor history of growth.  This company may be suitable for those looking for a dividend, but if the company does not begin to see growth it is unlikely to be able to continue to grow dividends into the future.  Defensive Investors and Enterprising Investors should proceed with researching other companies, starting with a review of the 5 Low PE Companies we reviewed yesterday at Seeking Alpha.  As it stands, the company’s EPSmg (normalized earnings) shrunk from $2.70 in 2008 to an estimated $2.57 for 2013.  In the meantime, the market is implying a growth rate of 4.94%.  Clearly the historical performance of the company does not support the market’s estimate, and so from a valuation perspective the company would appear to be overvalued.
  • Alcoa Inc. (AA) – Alcoa Inc. is a company that has seen better days and currently has a very poor valuation.  The company passes only three of the tests of the Defensive Investor and only one of the requirements of the Enterprising Investor.  The company has a poor current ratio, lacks earnings stability, has demonstrated no growth in earnings, and is trading at a high PEmg ratio.  Investors seeking to use a value investing approach as is used by ModernGraham would do better by looking at some companies that pass the requirements.  From a valuation perspective, Alcoa’s EPSmg (normalized earnings) have gone from $1.67 in 2008 to an estimated $0.13 for 2013.  This shrinking of earnings leads the ModernGraham valuation model to return an intrinsic value of $0.  There may be some value, but any method of calculating value that does not rely solely on the fundamentals of the company includes some level of speculation.  Intelligent Investors avoid speculation as much as possible, so they may be better served with a different company at this time.
  • Apartment Investment & Management Co. (AIV) – Apartment Investment & Management Co. fares extremely poorly in the ModernGraham valuation model.  First, it does not pass the requirements of either the Defensive Investor or the Enterprising Investor.  This is a result of the high level of debt relative to its current assets, but more than that it is a result of the terrible earnings figures put out by the company.  Earnings drive everything for businesses, even REITs.  Free cash flow is nice, but everything still comes down to earnings.  If a company does not earn money, it will not have cash to eventually trickle back to investors.  As for a valuation, the company’s consistently negative earnings lead to the valuation model returning a figure of $0.  If there is value here, it would be found through the balance sheet, but the high debt eliminates that as a possibility.
  • Cardinal Health Inc. (CAH) – Cardinal Health Inc. is not suitable for either the Defensive Investor or the Enterprising Investor.  The company’s current ratio is too low for either investor type, the company has not significantly grown its earnings over either a five year period or a ten year period, and the company trades at too high a PEmg and PB ratios.  As a result, investors seeking to follow ModernGraham’s updated version of Benjamin Graham’s requirements for Intelligent Investing should do further research into other companies, beginning with a review of the 5 Low PE Companies we reviewed this weekend on Seeking Alpha.  From a valuation perspective, Cardinal Health has shrunk its earnings from $2.98 in 2009 to an estimated $2.56 for 2014.  Meanwhile the market is implying a growth estimate of 8.84%, which is clearly well above the historical performance of the company.  As a result, Cardinal Health appears to be overvalued at the current time.
  • Suburban Propane Partners LP (SPH) – Suburban Propane Partners is a company that once had a very promising potential for profitable investing.  However, the last few years have seen a significant fall in earnings, and the company now is not suitable for either the Defensive Investor or the Enterprising Investor.  For both investor types, the company’s failure to grow its earnings (as mentioned, earnings have dropped), and its high debt relative to current assets are major turn-offs.  As for a valuation, the company’s EPSmg (normalized earnings) have dropped from $3.02 in 2008 to $1.87 in 2013.  Meanwhile the market is implying the company will grow its earnings at a rate of 8.28%.  Clearly, this implied growth rate is not supported by the historical performance and as a result the company would appear to be overvalued at the current time.  The ModernGraham valuation model even brings back a value of zero, which simply indicates that any value in the company does not come from the earnings.  Rather, value in the company must turn on the balance sheet, in which case we normally would look at the NCAV, but that is negative here as well.  As a result, it is our opinion that determination of the value includes too much speculation for investors seeking to follow ModernGraham’s interpretation of Benjamin Graham’s teachings.

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