Feature Stocks Value Investing Weekly

14 Companies in the Spotlight This Week – 2/22/14

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)

  • 500px-Ford_Motor_Company_Logo.svgFord Motor Company (F) – Ford Motor Company remains unsuitable for the Defensive Investor due to its lack of stability in earnings and dividends over the ten year period.  The Enterprising Investor looks at a much shorter time horizon, though, and the company passes all of the requirements of this investor type.  As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods will feel comfortable proceeding with further research.  An example of further research would be to look at other companies that pass the ModernGraham requirements through a review of ModernGraham Stocks & Screens.  As for a valuation, the company performs well in the ModernGraham valuation model after growing its EPSmg (normalized earnings) from -$3.60 in 2008 to $2.23 for 2013.  This solid level of growth is not reflected by the market, as the market is currently implying a growth rate estimate of -0.82%.  In other words, the market price indicates an expectation that the company’s EPSmg will shrink by 0.82% annually over the next 7-10 years.  Clearly this assumption is not supported by the historical achievements of the company, and the ModernGraham valuation model accordingly returns an intrinsic value estimate that exceeds the market price.

 

  • 500px-Intel-logo.svgIntel Corp (INTC) – Intel Corp. fares extremely well in the ModernGraham requirements, passing every test of both the Defensive Investor and the Enterprising Investor.  This is a company that appears to present low risk of financial strife and may present relative safety of principal.  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 into the opportunity.  An example of further research would be to look into some competitors, such as by a review of ModernGraham’s valuation of Hewlett-Packard Company (HPQ) and ModernGraham’s valuation of Texas Instruments (TXN).  From a valuation standpoint, the company looks very strong, having grown its EPSmg (normalized earnings) from $0.95 in 2009 to $2.00 for 2013.  This level of growth easily supports the market’s implied estimate for growth of 1.95%, and the ModernGraham valuation model returns an intrinsic value that exceeds the current market price.  Therefore, the company appears to be undervalued at the current time.

 

  • UnitedHealth_Group_logoUnitedHealth Group (UNH) – UnitedHealth Group is suitable for the Defensive Investor, and by default is also suitable for the Enterprising Investor.  The company passes all of the requirements of the Defensive Investor except the current ratio requirement.  The Enterprising Investor normally would like to see lower debt levels relative to the current assets, but is willing to overlook that in this case because the company passes so many requirements for the Defensive 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 into the company.  Such research should also include a review of other companies that pass these requirements, through a review of ModernGraham Stocks & Screens.  As for a valuation, the company has grown its EPSmg (normalized earnings) from $2.77 in 2008 to $4.95 for 2013.  This is a solid level of growth that outpaces the market’s implied estimate for growth of only 3.18% and leads the ModernGraham valuation model to return an intrinsic value that is greater than the market price.  As a result, the company appears to be undervalued at this time.

The Good (Defensive or Enterprising and Fairly Valued)

  • Boeing Company (BA) – Boeing Company passes the requirements of the Enterprising Investor, but not the Defensive Investor.  The company’s current ratio is too low, and it is trading at too high PEmg and PB ratios for the Defensive Investor.  The Enterprising Investor also does not like the current ratio, but the long-term debt level is low enough that the Enterprising Investor is willing to overlook the low current ratio.  As a result, this investor type should feel comfortable proceeding with further research into the company and other opportunities, beginning with a review of ModernGraham’s valuation of Lockheed Martin (LMT) and ModernGraham’s valuation of Honeywell International (HON).  From strictly a valuation standpoint, the company appears to be trading at a fair price.  The company has grown its EPSmg (normalized earnings) from $3.24 in 2009 to $5.13 for 2013.  This level of growth supports the market’s implied estimate for growth of 8.42%, and the ModernGraham valuation model returns an estimate of an intrinsic value that is within a margin of safety as the current price.

 

  • ConAgra Foods (CAG) – ConAgra Foods is suitable for either the Defensive Investor or the Enterprising Investor.  The company passes all of the requirements of the Defensive Investor except the current ratio requirement, and the company is therefore also suitable for the Enterprising Investor despite having a debt level relative to current assets that the Enterprising Investor normally wouldn’t permit.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.  Such research should include a review of ModernGraham Stocks & Screens.  From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $1.26 in 2009 to an estimated $1.82 for 2014.  This level of growth is good, not great, and supports the market’s current implied estimate for growth of 3.84%.  The ModernGraham valuation model returns an intrinsic value that is within the margin of safety when compared to the market price, leading to a conclusion that the company is fairly valued.

 

  • Hasbro Inc. (HAS) – Hasbro, Inc. is not suitable for the Defensive Investor due to its low current ratio and its high PB ratio.  The company is suitable for the Enterprising Investor after passing all of the requirements of the investor type, though the current ratio is rather close to the minimum.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods will be comfortable proceeding with further research to determine whether the company fits within their own personal investment strategy.  That research may include a review of other companies such as through a review of ModernGraham’s valuation of The Walt Disney Company (DIS) or ModernGraham’s valuation of Electronic Arts (EA).  From a valuation standpoint, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.65 in 2008 to $2.69 for 2013.  This level of growth is close to the market’s implied estimate for growth in earnings of 5.75%, and the ModernGraham valuation model returns an estimate of intrinsic value that falls within a margin of safety when compared with the current price.

 

  • Visa Inc. (V) – Visa is not suitable for the Defensive Investor because it has not had a long enough history as a publicly traded company.  The Defensive Investor requires ten years of publicly traded status before it may be suitable, as that helps ensure the reliability of the financial data.  The Enterprising Investor is not as strict, however, and Visa passes all of the requirements for this investor type.  As a result, 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 into the company.  Such research might include a review of ModernGraham’s analysis of MasterCard (MA).  From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $0.83 in 2009 to an estimated $6.54 for 2014.  This is a solid level of growth that definitely supports the market’s implied estimate for growth of 13.02%, but the ModernGraham valuation model returns an intrinsic value estimate within a margin of safety as the price.  As a result, the company appears to be fairly valued at the current time, but not undervalued.

The Mediocre (Defensive or Enterprising and Overvalued)

  • Baker Hughes Inc. (BHI) – Baker Hughes Inc. does not qualify for the Defensive Investor but does qualify for the Enterprising Investor.  The Defensive Investor is not interested because of its lack of sufficient earnings growth over the ten year period and its high PEmg ratio.  The Enterprising Investor’s only gripe is the lack of earnings growth over the five year period.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods will feel comfortable proceeding with further research into the company, including a review of ModernGraham’s valuation of National Oilwell Varco (NOV) and ModernGraham’s valuation of Schlumberger Ltd. (SLB).  From a valuation standpoint, the company does not fare well in the ModernGraham valuation model after seeing its EPSmg (normalized earnings) drop from $4.92 in 2008 to $2.77 for 2013.  This fall in earnings does not support the market’s implied estimate of earnings growth of 6.78%, leading the model to return an estimate of intrinsic value that is well below the market price.  Even if the company were to manage to achieve 3% growth, which would be contrary to the historical trend, it would still be overvalued.

 

  • Facebook Inc. (FB) – Facebook Inc. is a very intriguing company because of its extremely strong current ratio and low debt overall, but the company does not qualify for the Defensive Investor because of its short history as a publicly traded company.  The Enterprising Investor is willing to accept a higher level of risk, though, and does not require the same length of time as the Defensive Investor, particularly if earnings data is available from before the IPO.  With Facebook, the Enterprising Investor’s biggest concern right now is the lack of a dividend payment, which is all too common among young companies, but that is not enough on its own to eliminate the company from contention for investment.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company, including a review of other opportunities such as by looking at other companies that pass the ModernGraham requirements.  From a valuation perspective, the company appears overvalued.  Its EPSmg (normalized earnings) have grown from $0.02 in 2009 to $0.30 for 2013, which is a very solid level of growth, but the market seems to be pricing the company significantly higher than the earnings currently support.  The ModernGraham valuation model indicates an estimate of intrinsic value that is well below the market’s current price.

 

  • International Flavors & Fragrances (IFF) – International Flavors & Fragrances Inc. is not suitable for the Defensive Investor because it is trading at high PEmg and PB ratios.  The Enterprising Investor is not quite as picky though, and the company passes all of that investor type’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research to determine if the company would fit their individual portfolios.  Such research should include reviewing ModernGraham Stocks & Screens to find other companies that pass the ModernGraham requirements.  From a valuation perspective, the company appears to be overvalued presently.  The company has seen growth in EPSmg (normalized earnings) from $2.61 in 2008 to $3.58 for 2013, but this demonstrated historical growth trails the market’s implied estimate of 8.6% growth in earnings.  As a result, the ModernGraham valuation model returns an intrinsic value estimate that is below the market price.

The Bad (Speculative and Undervalued or Fairly Valued)

  • Delta Air Lines (DAL) – Delta Air Lines does not qualify for either the Defensive Investor or the Enterprising Investor.  The company needs more time to demonstrate stable earnings and growth in the post-bankruptcy period.  Though the company is showing some very encouraging signs of stability (four straight years of positive earnings), it will still take a couple more years before Intelligent Investors should be interested in the company as an investment.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should seek out some other opportunities, such as through a review of 5 Undervalued Companies for the Enterprising Investor or 5 Outstanding Dow Components. From strictly a valuation perspective, the company does look undervalued; however it is important to note that the results are affected by the massive write-offs the company recorded as it went through the bankruptcy process.  EPSmg (normalized earnings) grew from -$17.13 in 2008 to $1.58 for 2013.  This level of growth would more than support the market’s implied growth estimate of 5.67%, and based on the demonstrated growth from the bankruptcy years to today, the ModernGraham valuation model returns an intrinsic value greater than the market price.

 

  • Johnson Controls Inc. (JCI) – Johnson Controls Inc. is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is not interested because the company has a poor current ratio, has not had sufficient earnings stability or growth over the ten year period and is trading at high PEmg and PB ratios.  The Enterprising Investor is turned off by the high level of debt relative to the company’s 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 Stocks & Screens.  From solely a valuation perspective, the company does have some attractive qualities.  EPSmg (normalized earnings) have grown from $1.00 in 2009 to an estimated $2.32 for 2014, which is a strong level of growth that outpaces the market’s implied growth estimate of 6.51%.  The ModernGraham valuation model does return an estimate of intrinsic value that is above the market’s current price, so it appears the company may be undervalued.

The Ugly (Speculative and Overvalued)

Mr. Market

  • Ecolab Inc. (ECL) – Ecolab 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 the company is trading at PEmg and PB ratios that are too high.  The Enterprising Investor is turned off by the company’s high level of debt relative to its current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods may wish to seek other opportunities through a review of companies that pass the ModernGraham requirements.  From a valuation point of view, the company appears to be overvalued.  Though it has grown its EPSmg (normalized earnings) from $1.58 in 2008 to an estimated $2.60 for 2013, this level of demonstrated historical growth does not support the market’s implied estimate for growth of 15.57%.  The ModernGraham valuation model then returns an intrinsic value that is less than the market’s current price.

 

  • General Growth Properties (GGP) – Like most REITs, General Growth Properties does not appear suitable for either the Defensive Investor or the Enterprising Investor.  The company has not had earnings stability or sufficient growth over the ten year historical period, and the current ratio is too low for the Defensive Investor.  For the Enterprising Investor, the company lack of earnings stability and growth over the five year period, in addition to the debt level relative to the current assets are the deciding factors.  Value investors following the ModernGraham approach based on Benjamin Graham’s methods may wish to research over companies that pass these requirements by reviewing ModernGraham Stocks & Screens.  From a valuation perspective, the company fares very poorly in the ModernGraham valuation model due to the current year’s negative EPSmg (normalized earnings).  As a result, we are left to assume that any value in the company arises from the balance sheet, and it should be noted that the net current asset value (NCAV) is negative.  Therefore, due to the poor earnings growth and the negative NCAV, the company appears to be overvalued presently.

Disclaimer:  The author held a long position in Ford Motor Company (F) 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.

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