Feature Stocks Value Investing Weekly

14 Companies in the Spotlight This Week – 1/25/14

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, which was just released this week!

The Elite (Defensive or Enterprising and Undervalued)

  • Philip Morris International (PM) – Philip Morris looks like a good value opportunity for both the Defensive Investor and the Enterprising Investor.  The only requirement of the Defensive Investor that is not met is the current ratio, and since it is suitable for the Defensive Investor, it is by default also suitable for the Enterprising Investor.  For value investors seeking to follow Benjamin Graham’s methods, this company should be very intriguing, especially given its high dividend yield.  For comparative purposes, value investors may wish to review the ModernGraham valuation of Altria Group (MO) and other companies that meet the ModernGraham requirements.  From a valuation perspective, the company fares well after having grown EPSmg (normalized earnings) from $2.96 in 2008 to an estimated $4.89 for 2013.  This level of growth more than supports the market’s implied estimate of 4.36%, leading to the company being seen as undervalued by the ModernGraham valuation model.  As a result, Defensive Investors and Enterprising Investors should feel very comfortable proceeding with further research to determine if the company is suitable for their individual portfolios.

The Good (Defensive or Enterprising and Fairly Valued)

  • American Express (AXP) – Since I rated American Express as undervalued last October, it has risen over 13% to now priced by the market within the margin of safety.  The company is suitable for the Enterprising Investor but not the Defensive Investor, because it currently trades at high PEmg and PB ratios.  As a result, Enterprising Investors wishing to follow Benjamin Graham’s methods should feel comfortable proceeding with further research to determine if American Express would be good for their individual portfolio, beginning with a review of a competitor through looking at the ModernGraham valuation of Capital One Financial (COF).  As for a valuation, though the company missed most analyst’s forecasts for Q4 2013 earnings, it actually did better than the ModernGraham valuation model expected (I believe it is important to be very conservative when estimating future results, as it is better to have an estimate of intrinsic value which is too low than to have an estimate that is too high), and the valuation has improved slightly since the last review.  EPSmg (normalized earnings) grew from $2.42 in 2009 to $4.04 in 2013, a level of growth that supports the market’s implied estimate of 7.02%, and the company currently appears to be fairly valued.

The Mediocre (Defensive or Enterprising and Overvalued)

  • 3M Company (MMM) – When we last looked at 3M (view our last valuation here), it was rated as suitable for the Enterprising Investor and overvalued.  This time, the result is no different; though the valuation itself has increased, the market has also increased its price level.  The Defensive Investor remains turned off by the current ratio and the high PEmg and PB ratios.  As a result, Enterprising Investors should feel comfortable keeping 3M on a watch list to see if the price lowers to a place that is closer to the intrinsic value.  In addition, Enterprising Investors may wish to do further research into some other companies, such as by reviewing the ModernGraham Valuation of Honeywell International and the ModernGraham valuation of Hewlett-Packard Company.  As for the valuation, the company has grown EPSmg (normalized earnings) from $4.88 in 2009 to an estimated $6.16 for 2013.  This level of growth is impressive, but does not support the market’s implied estimate of 6.9%.  As a result, the company appears to be overvalued presently.
  • Ensco PLC (ESV) – Ensco is an intriguing company for Defensive Investors and Enterprising Investors, and should be kept on their watch lists.  The Defensive Investor’s only gripe with the company is that the current ratio is a little lower than what he would like to see, and the company qualifies for the Enterprising Investor because it also qualifies for the Defensive Investor.  These value investors seeking to utilize Benjamin Graham’s methods should keep an eye on Ensco while researching other companies that pass the ModernGraham requirements.  From a valuation perspective, the company doesn’t appear like a great value opportunity at the current time.  EPSmg (normalized earnings) have dropped from $6.13 in 2009 to an estimated $4.90 for 2013.  Meanwhile, the market is implying a growth rate of 1.36%, but since the historical performance has shown a drop in earnings, the market’s estimate is not supported by the historical data.  Until the growth in earnings improves, this company may be overvalued.

The Bad (Speculative and Undervalued or Fairly Valued)

  • MetLife (MET) – MetLife Inc. would be suitable for the Enterprising Investor if it had not posted a loss in 2009.  The company has demonstrated at least some growth in its earnings over the five year period, and pays a dividend, but Enterprising Investors require stable earnings for at least five years.  Note, however, that assuming all other things stay the same, next year the company will have achieved the requisite number of stable earnings years to qualify for the Enterprising Investor.  Defensive Investors are not interested in the company because of the lack of earnings stability or earnings growth over the ten year period.  As a result, Enterprising Investors should keep an eye on MetLife while researching other opportunities this year, perhaps beginning with a review of ModernGraham’s analysis of AFLAC Corporation (AFL).  From a valuation side of things, MetLife has grown its EPSmg (normalized earnings) from $2.11 in 2009 to an estimated $2.87 for 2013.  The market is currently implying a growth rate estimate of 4.97%, and the historically demonstrated growth supports the market’s estimate.  Therefore the company would appear to be fairly valued presently.
  • Mohawk Industries (MHK) – Mohawk Industries has seen some rapid growth over the last few years, but it does not qualify for either the Defensive Investor or the Enterprising Investor.  The company’s earnings have lacked stability over the last 5-10 years, it does not pay a dividend, and it is trading at a high PEmg ratio.  As a result, value investors seeking to follow Benjamin Graham’s methods should review other opportunities, while keeping in mind the 7 Key Tips to Value Investing.  As for a valuation, the company has achieved a substantial level of growth over the last 5 years, having risen EPSmg (normalized earnings) from -$2.40 in 2009 to an estimated $3.56 for 2013.  This level of growth provides some support to the market’s implied estimate for growth of 16.34%, and the company therefore appears to be fairly valued at the present time.
  • Regions Financial (RF) – Regions Financial Corp needs a couple more years to prove it has recovered from the financial crisis before the Defensive Investor or the Enterprising Investor should be interested.  For the Defensive Investor, the company has not sufficiently grown its earnings over a ten year period, has not had stable earnings over the period, and currently trades at a high PEmg ratio.  For the Enterprising Investor, the company looks good except for the lack of earnings stability over the five year period.  Once the company has had five consecutive years of positive earnings, the company will be much more attractive to Enterprising Investors.  As it stands now, value investors seeking to follow Benjamin Graham’s methods should look to other opportunities, such as by reviewing ModernGraham’s analysis of JP Morgan or ModernGraham’s analysis of Capital One Financial.  From a valuation side of things, the company has grown its EPSmg (normalized earnings) from -$1.69 in 2009 to an estimated $0.33 for 2013.  While this is a solid level of growth that demonstrates the company is improving over its performance during the financial crisis, it does not support the market’s current estimate for growth of 12.20%.  As a result, the company would appear to be overvalued at the current time.

The Ugly (Speculative and Overvalued)

Mr. Market

  • Altria Group (MO) – Altria Group is a company that Defensive Investors and Enterprising Investors should shy away from for the near future.  The company has a poor current ratio, has not achieved sufficient growth over either the 5-year or 10-year historical period, and is trading at a high PB ratio.  Value investors seeking to follow Benjamin Graham’s methods should seek other opportunities, starting with a review of companies that pass the ModernGraham requirements.  From a valuation perspective, the company’s poor level of growth over the last 5 years does not support much of a value.  EPSmg (normalized earnings) have actually dropped from $2.88 in 2009 to an estimated $2.09 for 2013.  This indicates that any value must come from the balance sheet, rather than the earnings, but the net current asset value is also very poor for this company.  Therefore, the company would appear to be overvalued presently.
  • Electronic Arts (EA) – Electronic Arts creates some great video games, but it has not demonstrated the business results that value investors like to see.  In particular, the only thing the Defensive Investor likes about EA is the market cap, while the Enterprising Investor only likes the earnings growth over the five year period.  The company fails all of the other requirements of Defensive Investors and Enterprising Investors.  As a result, value investors seeking to follow Benjamin Graham’s methods should spend some time researching other companies, such as Microsoft Corp (MSFT).  From a valuation perspective, the company has grown its EPSmg from -$1.27 in 2009 to an estimated $0.20 for 2014, but that level of growth does not come anywhere near supporting the market’s current estimate of 54.63%.  Therefore, the company appears to be overvalued at the current time.
  • Kraft Foods Group (KRFT) – Kraft Foods completed a spin-off of its North American business, naming the North American business Kraft Foods Group.  This newly formed company is what we are analyzing here, and as a result of its short operating history, there is ample possibility for speculating.  It is important to note that while many would attempt to analyze Kraft Foods Group using data from before the spin-off, this is a difficult process because of the speculation that may present itself when doing so (i.e. how would the company have done in 2009 if it were a stand-alone operation?).  Since avoiding speculation is one of the 7 Key Tips to Value Investing, we only review the data attributable to Kraft Foods Group since the spin-off, as if it were a brand new start-up.  As a result, Kraft Foods Group does not qualify for the Defensive Investor or the Enterprising Investor because of its short history.  The Defensive Investor requires a ten-year operating history while the Enterprising Investor strongly prefers a five-year operating history (this requirement can be overlooked if the company’s debt is low compared to current assets, but that is not the case here).  It should be noted that even if investors utilize data from prior to the spin-off, the company would still not qualify for the Defensive Investor because of its high PB ratio and low current ratio.  As for a valuation, the ModernGraham valuation model will not make an estimate for growth based on such a short time frame, so we are left with using either the value based on 3% growth or the net current asset value.  Under either approach, the company would appear to be overvalued.
  • Lockheed Martin (LMT) – Lockheed Martin has some excellent qualities, but does not quite qualify for either the Defensive Investor or the Enterprising Investor.  The company has too low a current ratio, and too high a PB ratio for the Defensive Investor.  For the Enterprising Investor, the high level of debt relative to net current assets is the deciding factor.  Therefore, value investors seeking to follow the methods of Benjamin Graham should seek other opportunities, beginning by reviewing ModernGraham’s analysis of The Boeing Company (BA).  From a valuation perspective, the company has seen growth in EPSmg (normalized earnings) from $7.15 in 2009 to an estimated $8.41 for 2013.  This moderate growth is good to see, but does not support the market’s implied growth rate of 4.9%.  As a result, the company appears to be overvalued at the present time.
  • Morgan Stanley (MS) – Morgan Stanley is not suitable for either the Enterprising Investor or the Defensive Investor at this time.  The company has not sufficiently grown earnings over the ten year period, had a negative earnings year in 2009, and is current trading at a high PEmg ratio.  The Enterprising Investor’s time horizon only includes the five year historical period, but the lack of earnings growth and stability over that time period eliminates the company from contention for that investor type as well.  Therefore, value investors seeking to follow Benjamin Graham’s methods may wish to seek other opportunities, such as by reviewing companies that pass the ModernGraham requirements.  From a valuation perspective, the company fares poorly in the ModernGraham valuation model, due to the drop in EPSmg (normalized earnings) from $3.48 in 2008 to $1.13 for 2013.  The market is estimating earnings will grow at a pace of 10.48%, which is clearly not supported by the historical performance of the company.  As a result, it appears that Morgan Stanley is overvalued at the current time.
  • Pepsico Inc. (PEP) – Pepsico Inc. leaves the Defensive Investor and Enterprising Investor wondering where the company could be if it reached its potential.  The Pepsi brand is very strong, but the current ratio is too low for the Defensive Investor and the PEmg and PB ratios are too high.  The Enterprising Investor is turned off by the high level of debt relative to the current assets.  The company is not necessarily a risky investment, but one is left to wonder what could the company do with an even better financial position?  Value investors seeking to follow Benjamin Graham’s methods may wish to review other opportunities such as by taking a look at ModernGraham’s valuation of The Coca-Cola Company (KO).  In terms of a valuation, Pepsico has grown its EPSmg (normalized earnings) only from $3.13 in 2008 to an estimated $4.02 for 2013.  This is a weak level of growth that does not support the market’s current estimate of 6.07%.  As a result, the company would appear to be overvalued at the current time.
  • The Southern Company (SO) – The Southern Company would be a much more intriguing company if it achieved more sufficient growth.  As it stands, it is not suitable for the Defensive Investor because it has failed to adequately grow its earnings over the ten year period, and its current ratio is far too low.  In addition, the level of debt relative to the current assets is too high for the Enterprising Investor.  Value investors wishing to follow Benjamin Graham’s methods may want to look at other opportunities, such as by reviewing a list of companies that pass the ModernGraham requirements.  From a valuation perspective, the company has only grown its EPSmg (normalized earnings) from $2.14 in 2009 to an estimated $2.29 for 2013.  This is a very low level of growth that does not even support the market’s implied estimate of 4.81% growth.  As a result, the company would appear to be overvalued based on the ModernGraham valuation model.  The company does have a strong dividend yield, though, and if investors are willing to take on more risk than value investors typically accept, there may be justification for investment.  However, the question remains if the company is unable to grow its earnings adequately, how is it going to grow its dividends over the long-term?

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