5 Undervalued Companies for the Enterprising Investor – March 2014

image (5)There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five most undervalued companies reviewed by ModernGraham. Each company has been determined to be suitable for the Enterprising Investor according to the ModernGraham approach. This is a sample of one screen that is included in ModernGraham Stocks & Screens, our monthly publication.  Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk. Each company suitable for the Defensive Investor is also suitable for Enterprising Investors, so Enterprising Investors may also be interested in reviewing 5 Undervalued Companies for the Defensive Investor – March 2014 while also conducting further research into the following companies.

This month, FreePort-McMoRan Copper & Gold Inc. (FCX) is added to the list, replacing Bed Bath & Beyond (BBBY).

Ford Motor Company (F)

500px-Ford_Motor_Company_Logo.svgFord 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.  (Read the full valuation here)
F Chart

F data by YCharts

Freeport-McMoRan Copper & Gold Inc. (FCX)

500px-Freeport_McMoRan.svgFreePort-McMoran is an interesting company in the ModernGraham valuation model.  It does not pass the requirements of the Defensive Investor, as it has not consistently paid dividends over the last ten years, and it has not shown earnings stability over the last ten years.  But it does pass the requirements of the Enterprising Investor, though it has a higher level of debt relative to current assets than the investor type likes to see.  As a result, Enterprising Investors should feel comfortable proceeding with their research, beginning with a review of a Glance at the Dow and 5 Low PEmg Companies for the Enterprising Investor.  From a valuation perspective, the ModernGraham valuation is affected significantly by the large earnings loss in 2008, which has caused the EPSmg (normalized earnings) figure for 2009 to be very low in relation to 2013.  As it stands, the EPSmg have grown from -$1.67 to $3.48, indicating a high level of growth that would appear to significantly outpace the market’s implied estimate of 0.17% earnings growth.  This has led the model to return an intrinsic value estimate that is well above the market price, and the overall result that the company is undervalued is supported by the valuation based on only 3% growth. (Read the full valuation here)
FCX Chart

FCX data by YCharts

Capital One Financial (COF)

500px-Capital_One_Financial_logo.svgCapital One Financial is a company that stands out from its peers, having survived the financial meltdown without posting a negative earnings year.  This company is not suitable for the Defensive Investor, due to not sufficiently growing earnings over the ten year period, but it is suitable for the Enterprising Investor.  Capital One appears to have solid earnings stability, a strong dividend history, and is trading at low PEmg and PB ratios.  Value investors seeking to follow Benjamin Graham’s methods for the Enterprising Investor should feel very comfortable proceeding with further research, beginning with a review of ModernGraham’s Valuation of American Express (AXP).  In terms of a valuation, the company has grown EPSmg (normalized earnings) from $3.14 in 2009 to an estimated $6.36 in 2013.  This is solid growth that more than supports the market’s implied estimate for growth of 1.44%, indicating the company may be undervalued presently.  (Read the full valuation here)
COF Chart

COF data by YCharts

Apple Inc. (AAPL)

500px-Apple_logo_black.svgApple Inc. is an excellent company for Enterprising Investors, having failed only the investor type’s current ratio requirement.  The company does not qualify for the Defensive Investor due to its low current ratio, lack of a long enough dividend record, and high PB ratio.  As a result, Enterprising Investors should feel very comfortable proceeding with further research into the company and its competitors, including a review of ModernGraham’s valuation of Microsoft (MSFT) and ModernGraham’s valuation of Google (GOOG).  As for a valuation, the company appears to be significantly undervalued.  Apple has grown its EPSmg (normalized earnings) from $9.22 to an estimated $37.86 for 2014, a growth rate that far outpaces the market’s implied estimate of only 2.76% earnings growth.  The ModernGraham valuation model has accordingly returned an estimate of intrinsic value that is much higher than the market price.  (Read the full valuation here)
AAPL Chart

AAPL data by YCharts

Gannett Co., Inc. (GCI)

500px-Gannett_logo_2011.svgGannett is an intriguing company for Enterprising Investors, after having passed every requirement of the investor type except the debt to current assets requirement.  The company does not qualify for Defensive Investors, however, because of the current ratio being too low, and the lack of earnings stability or sufficient growth over the ten year period.  As a result, Enterprising Investors should feel very comfortable proceeding with further research to determine if Gannett is suitable for their individual portfolios, keeping in mind the 7 Key Tips to Value Investing.  From purely a valuation standpoint, the company appears undervalued, after growing EPSmg (normalized earnings) from -$6.63 in 2008 to an estimated $1.93 for 2013.  This level of growth significantly outpaces the market’s current implied estimate of growth (3.05%), and the ModernGraham valuation model indicates a value around $74.  (Read the full valuation here)
GCI Chart

GCI data by YCharts

What do you think?  Are these companies a good value for Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author held a position in Ford Motor Company (F) and Apple Inc. (AAPL), but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing those holdings within the next 72 hours.

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