14 Companies in the Spotlight This Week – 2/15/14

We 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)

• Ace Limited (ACE) - Ace Limited is an extremely attractive company, despite its continued rise in price over the last number of years.  The company passes every requirement of both the Defensive Investor and the Enterprising Investor, demonstrating that it is financially sound.  Value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research to determine if the company is right for their individual portfolios.  Such research could include a review of ModernGraham’s valuation of AFLAC (AFL), or a review of ModernGraham’s valuation of The Chubb Corporation (CB).  From a valuation perspective, the company looks great, having grown its EPSmg (normalized earnings) from $5.30 in 2008 to $7.87 for 2013.  This level of growth outpaces the market’s current implied estimate for earnings growth of only 1.83%, and the ModernGraham valuation model returns an intrinsic value that is well above the market price.

 

• Microsoft Corp. (MSFT) - Microsoft Corporation fares slightly better today than it did during its last quarterly valuation (on November 12, 2013 it was given a fairly valued & defensive rating).  Today it is still considered suitable for the Defensive Investor, but the intrinsic value has improved slightly.  The company passes all of the requirements of the Defensive Investor, save for the PB ratio requirement.  It also passes all of the requirements of the Enterprising Investor.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research to determine whether the company fits their individual portfolios, beginning with a review of ModernGraham’s valuation of Apple (AAPL) and ModernGraham’s valuation of Google (GOOG).  From a valuation perspective, as noted the intrinsic value is slightly higher than it was previously, due to better than estimated earnings results.  The company has grown its EPSmg (normalized earnings) from $1.56 in 2009 to an estimated $2.46 for 2014.  This level of growth is very solid and outpaces the market’s current implied estimate for growth of 3.18%, leading the ModernGraham valuation model to return an intrinsic value that is greater than the market price.  It should be noted, though, that the value is just slightly outside of the margin of safety, so the company barely earns an undervalued rating.

 

• Unum Group (UNM) - Unum Group is a rather attractive company for the Enterprising Investor, and will likely soon qualify for the Defensive Investor as well.  Currently, the company does not qualify for the Defensive Investor because it had a negative earnings year in 2004, so it has not met the requirement of 10 straight years of positive earnings.  Next year it will more than likely satisfy that requirement, but for now Defensive Investors should merely keep the company on the watch list.  Enterprising Investors wishing to follow the ModernGraham approach based on Benjamin Graham’s methods should feel good proceeding with further research including a review of ModernGraham’s valuation of AFLAC Inc. (AFL) and other companies that pass the ModernGraham requirements.  From a valuation side of things, the company has done well, having grown its EPSmg (normalized earnings) from $1.33 in 2008 to $2.64 for 2013.  This solid level of growth outpaces the market’s implied estimate for growth of only 1.99%, leading the ModernGraham valuation model to return an intrinsic value greater than the market price.  As a result, the company appears to be undervalued at the present time.

 

• Yahoo Inc. (YHOO) - Yahoo! Inc. is a very attractive company for Enterprising Investors, as it passed all of the investor type’s requirements except the dividend payments.  The Defensive Investor is not as interested, due to the lack of dividend payments and the high PEmg and PB ratios.  Value investors seeking to follow the Enterprising Investor portion of the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research.  An example of further research may include a review of ModernGraham’s valuation of Microsoft and ModernGraham’s valuation of Google.  From a valuation perspective, Yahoo has grown its EPSmg (normalized earnings) from $0.54 in 2008 to $1.62 for 2013.  This is a very strong level of growth that outpaces the market’s implied estimate for growth of 7.38%.  The ModernGraham valuation model consequently estimates an intrinsic value that is well above the market’s current price, and the company would appear to be undervalued.

The Good (Defensive or Enterprising and Fairly Valued)

• Molson Coors Brewing Co. (TAP) - Molson Coors is an intriguing company to both Defensive Investors and Enterprising Investors, and should be kept on their watch lists.  For the Defensive Investor, the company only fails the current ratio requirement, and because the company is suitable for the Defensive Investor, it is also suitable for the Enterprising Investor.  Value investors interested in following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research, including a comparison of Molson Coors to other companies that pass the ModernGraham requirements.  From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $2.27 in 2008 to an estimated $3.43 for 2013.  This level of growth solidly supports the market’s implied estimate of 3.38% growth and the company would appear to be fairly valued by the ModernGraham valuation model at this time.

 

• Travelers Companies (TRV) - Travelers fares very well in the ModernGraham approach, having passed all of the requirements of both the Defensive Investor and the Enterprising Investor.  The intrinsic value has improved from $85.91 in our last valuation of the company to $96.30, largely due to earnings figures that were better than I anticipated (side note: this is a great benefit of basing valuations on the low estimates – it is better to have guessed low than guess high).  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research.  Research should include a review of some other companies, such as through a review of ModernGraham’s valuation of Ace Limited (ACE), or ModernGraham’s valuation of AFLAC (AFL).  From a valuation perspective, the company has improved its EPSmg (normalized earnings) from $5.11 in 2008 to $6.84 for 2013.  This is a solid level of growth that supports the market’s current implied growth estimate of 1.81%.  As a result, the company appears to be fairly valued at the present time.

 

• Varian Medical Systems Inc. (VAR) - Varian Medical Systems is suitable for the Enterprising Investor, having passed all requirements except the dividend payment requirement.  The company is not suitable for the Defensive Investor, due to the lack of dividend payments as well as high PEmg and PB ratios.  Enterprising Investors should feel comfortable moving forward with further research into the company, including a review of ModernGraham’s valuation of General Electric, and other companies that pass the ModernGraham requirements.  From a valuation perspective, the company appears fairly valued after growing its EPSmg (normalized earnings) from $2.21 in 2009 to an estimated $3.89.  This level of growth is supportive of the market’s implied estimate of 6.08%, leading the ModernGraham valuation model to return an intrinsic value estimate within a margin of safety in comparison to the market price.

The Mediocre (Defensive or Enterprising and Overvalued)

• Nike Inc. (NKE) - Nike has exhibited some great growth, and has many qualities that make it very attractive; however, the company is not suitable for the Defensive Investor because it is trading at too high PEmg and PB ratios.  Enterprising Investors are not as concerned about those ratios, though, and the company passes all of the requirements for that investor type.  As a result, Enterprising Investors following a ModernGraham approach should feel comfortable proceeding with further research into the company, including a review of other companies that pass the ModernGraham requirements.  As for a valuation, Nike has grown its EPSmg (normalized earnings) from $1.55 in 2009 to an estimated $2.58 for 2014.  This solid level of growth is impressive, but it lags behind the market’s implied growth estimate of 9.86%, leading the ModernGraham valuation model to return an intrinsic value estimate that is below the market’s price.  Therefore, it would appear that Nike is currently overvalued.

 

The Bad (Speculative and Undervalued or Fairly Valued)

• Starbucks Corp. (SBUX) - Starbucks is a very reputable company, but it does not qualify for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s current ratio is too low, it does not have a long enough dividend history, and it currently trades at high PEmg and PB ratios.  For the Enterprising Investor, the company’s debt is too high relative to its current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should research other opportunities such as through a review of companies that pass the ModernGraham requirements.  From a valuation perspective, the company has seen solid growth, having grown its EPSmg (normalized earnings) from $0.60 in 2009 to an estimated $2.11 for 2014.  This level of growth is in line with the market’s current implied estimate of 13.30% growth, and the ModernGraham valuation model returns an intrinsic value within the margin of safety.  Therefore, the company appears to be fairly valued at the present time.

The Ugly (Speculative and Overvalued)

• BB&T Corporation (BBT) - BB&T Corporation does not qualify for either the Defensive Investor or the Enterprising Investor.  The company has not demonstrated sufficient growth over either the 5 year or 10 year period.  Value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods may find better opportunities elsewhere through research, such as by reviewing ModernGraham’s valuation of Wells Fargo & Co. (WFC).  From a valuation perspective, the company has seen its EPSmg (normalized earnings) go from $2.89 in 2008 to $2.28 for 2014.  This lack of growth certainly does not support the market’s implied growth estimate of 4%.  As a result, the ModernGraham valuation model returns an intrinsic value that is above the market price, and the company appears to be overvalued at this time.

 

• Proctor & Gamble (PG) - Proctor & Gamble is not suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s current ratio is too low and it is trading at PEmg and PB ratios that are too high.  For the Enterprising Investor, there is too much debt relative to the company’s current assets.  As a result, value investors may wish to research other opportunities, such as by reviewing ModernGraham’s valuation of Colgate-Palmolive and ModernGraham’s valuation of Johnson and Johnson.  From strictly a valuation standpoint, the company has grown its EPSmg (normalized earnings) from $3.30 in 2009 to an estimated $3.82 for 2014.  While this growth supports the company’s continued raising of the dividend, it does not support the market’s current implied earnings growth estimate of 5.97% and as a result the ModernGraham valuation model returns an intrinsic value that is below the market’s current price.

 

• U.S. Steel Corporation (X) - U.S. Steel is not suitable for either the Defensive Investor or the Enterprising Investor.  The company has had a number of negative earnings years recently, which is extremely off-putting for Intelligent Investors.  For the Defensive Investor, the lack of earnings stability or growth along with the low current ratio eliminate the company from consideration.  For the Enterprising Investor, it is the level of debt relative to current assets in addition to the lack of earnings stability and growth.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should seek out other opportunities by reviewing a list of 5 Outstanding Dow Components.  From a valuation perspective, the company fares very poorly in the ModernGraham model due to the shrinking EPSmg (normalized earnings) and the negative EPSmg in the current year.  As a result, the company appears to be overvalued at the current time.

 

• Walgreen Company (WAG) - Walgreen Company does not pass enough of the requirements of either the Defensive Investor or the Enterprising Investor in order to be suitable for investment by Intelligent Investors.  Specifically, the company fails the Defensive Investor’s current ratio, PEmg ratio, and PB ratio requirements.  The company fails the Enterprising Investor’s requirements by having too much debt relative to its current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should research other opportunities, such as through a review of ModernGraham’s valuation of CVS Caremark Corporation or ModernGraham’s Glance at the Dow.  From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $1.99 in 2009 to an estimated $2.82 for 2014.  This level of growth is solid, but does not support the market’s current implied estimate for earnings growth of 7.15%, leading the ModernGraham valuation model to estimate that the intrinsic value is below the market price at this time.

 

• Zions Bancorporation (ZION) - Zions Bancorporation does not pass the requirements of either the Defensive Investor or the Enterprising Investor.  The company presents too much risk for the Defensive Investor, after failing to have sufficient earnings stability or growth over the ten year historical period and currently trading at a high PEmg ratio.  The company also presents slightly more risk than the Enterprising Investor is willing to accept, as it has not had the requisite earnings stability in the five year historical period.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should seek out other opportunities, such as through a review of ModernGraham’s valuation of People’s United Financial (PBCT) or other companies that pass the ModernGraham requirements.  The company also fares rather poorly in the ModernGraham valuation model, as a result of the very weak EPSmg (normalized earnings) for 2013.  The company has improved its EPSmg substantially, from -$2.08 in 2009 to $0.02 for 2013, but until that figure is considerably higher, the valuation will continue to be poor.

Disclaimer:  The author held a long position in Apple Inc. (AAPL) but did not hold a position in any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logos taken from either the company website or Wikipedia; this article is not affiliated with the companies in any manner.