Feature Value Investing Weekly

17 Companies in the Spotlight This Week – 3/29/14

image (7)We looked at 17 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)

  • mts_logoMTS Systems Corp (MTSC) – MTS Systems Corp passes all of the requirements of the Enterprising Investor, but does not qualify for the Defensive Investor.  For that investor type, the company’s overall size is too small, the current ratio is too low, and it is trading at high PEmg and PB ratios.  As a result, Enterprising Investors should feel comfortable proceeding with further research into the company and its competitors, including a review of 5 Undervalued Companies for the Enterprising Investor and 5 Low PEmg Companies for the Enterprising Investor.  From a valuation side of things, the company looks very strong after growing its EPSmg (normalized earnings) from $1.63 in 2010 to an estimated $3.34 for 2014.  This demonstrated level of growth outpaces the market’s implied estimate of 5.95% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

 

  • National_Oilwell_Varco_Logo.svgNational Oilwell Varco (NOV) – National Oilwell Varco is suitable for either the Defensive Investor or the Enterprising Investor.  The only requirement for either investor type that the company did not pass was the ten year dividend history as required by the Defensive Investor.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfrotable proceeding with further research into the company and its competitors, through a review of ModernGraham’s valuation of Baker Hughes (BHI) and ModernGraham’s valuation of Schlumberger (SLB).  From a valuation perspective, the company appears to be undervalued presently, having grown its EPSmg (normalized earnings) from $3.55 in 2009 to $5.07 for 2013.  This demonstrated level of growth surpasses the market’s implied estimate of 3.05% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

 

  • 500px-Oracle_logo.svgOracle Corp (ORCL) – Oracle Corp is a great looking company, especially for the Enterprising Investor, as the company passes all of the requirements of that investor type.  The Defensive Investor is not as interested presently due to the lack of a long enough dividend history and the high PB ratio.  As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company as well as other opportunities, including a review of ModernGraham’s valuation of Hewlett-Packard Company (HPQ) and ModernGraham’s valuation of International Business Machines (IBM).  From a valuation standpoint, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.06 in 2010 to an estimated $2.22 for 2014.  This demonstrated level of growth outpaces the market’s implied estimate of 4.2% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the price.

 

  • 500px-QualcommLogo.svgQualcomm Inc. (QCOM) – Qualcomm is an interesting company that should catch the attention of all Enterprising Investors after passing all of the requirements for the investor type.  The Defensive Investor isn’t quite as interested, as the company is trading at high PEmg and PB ratios at this time.  As a result, Enterprising Investors should feel very comfortable proceeding with further research into the company as well as some competitors through a review of ModernGraham’s valuation of Intel Corp (INTC) and ModernGraham’s valuation of Texas Instruments (TXN).  From a valuation side of things, the company appears to be solidly undervalued after growing its EPSmg (normalized earnings) from $1.64 in 2010 to an estimated $3.66 for 2014.  This high level of demonstrated growth outpaces the market’s implied estimate of only 6.55% earnings growth and leads the ModernGraham valuation model to return an intrinsic value estimate that is well above the market price.

 

  • 500px-Viacom_logo.svgViacom Inc. (VIAB) – Viacom is an intriguing company for the Enterprising Investor, having passed all but one of the investor type’s requirements.  The company does not qualify for the Defensive Investor, though, due to the low current ratio, lack of long enough dividend history, and high PB ratio.  As a result, Enterprising Investors should feel comfortable conducting further research into the company and its competitors, such as through a review of ModernGraham’s valuation of Time Warner (TWX) and ModernGraham’s valuation of The Walt Disney Company (DIS).  From a valuation perspective, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.29 in 2010 to an estimated $4.62 for 2014.  This solid level of demonstrated growth outpaces the market’s implied estimate of 4.99% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

 

  • 500px-WesternDigitalLogo.svgWestern Digital Corp (WDC) – Western Digital Corp is a very intriguing company for Enterprising Investors, as it passes all five of the investor type’s requirements.  It does not qualify for Defensive Investors due to its low current ratio and lack of a ten year dividend history.  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 as well as other opportunities.  As for a valuation, the company appears to be significantly undervalued despite the recent rise in the market price.  The company has grown its EPSmg (normalized earnings) from $3.75 in 2010 to an estimated $5.79 for 2014, a level of demonstrated growth that surpasses the market’s implied estimate of 3.46% earnings growth.  This leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above a margin of safety relative to the current price.

 

The Good (Defensive or Enterprising and Fairly Valued)

  • Monsanto Company (MON) – Monsanto is suitable for the Enterprising Investor but not the Defensive Investor due to the low current ratio, and high PEmg and PB ratios.  The company passes every requirement of the Enterprising Investor, though, and should remain on the investor type’s watch list.  In addition, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research, including a review of ModernGraham’s valuation of E I Du Pont de Nemours and Co. (DD) and ModernGraham’s valuation of Dow Chemical (DOW).  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.70 in 2010 to an estimated $4.22 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 9.15% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.

 

  • Olin Corp (OLN) – Olin Corp is a very intriguing company for both the Defensive Investor and the Enterprising Investor.  In fact, the company passes all of the requirements of the Defensive Investor and only fails the debt to net current asset requirement 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 into the company as well as other opportunities through a review of 5 Undervalued Companies for the Defensive Investor.  From a valuation standpoint, the company appears to be fairly valued, having grown its EPSmg (normalized earnings) from $1.81 in 2009 to $2.05 in 2013.  While this level of demonstrated growth is on the lower end of most companies, it supports the market’s implied estimate of 2.37% earnings growth, leading the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety in relation to the price.

The Mediocre (Defensive or Enterprising and Overvalued)

  • Paychex Inc. (PAYX) – Paychex Inc. is suitable for the Enterprising Investor but not the Defensive Investor.  The company’s current ratio is too low while the PEmg and PB ratios are too high for the Defensive Investor.  The Enterprising Investor is willing to accept the low current ratio, though, because the company holds no long-term debt.  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 as well as other opportunities, including a review of ModernGraham’s valuation of Automatic Data Processing (ADP).  From the valuation side of things, the company appears overvalued after demonstrating very little growth in recent history.  The company’s EPSmg (normalized earnings) have only grown from $1.41 in 2010 to an estimated $1.56 for 2014.  This low level of demonstrated growth does not support the market’s current implied estimate of 9.17% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below the market price.

 

  • Psychemedics Corp (PMD) – Psychemedics Corp is a very small company that is not suitable for the Defensive Investor but does pass all of the requirements of the Enterprising Investor.  While the small size of the company is not enough to eliminate it from contention for the Defensive Investor, the company also has not shown sufficient earnings growth over the ten year period and has high PEmg and PB ratios.  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 as well as other opportunities.  From a valuation perspective, the company appears to be overvalued currently, after growing its EPSmg (normalized earnings) from $0.60 in 2009 to only $0.61 in 2013.  This very low level of demonstrated growth does not support the market’s implied estimate of 10.19% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.

The Bad (Speculative and Undervalued or Fairly Valued)

  • XL Group (XL) – XL Group does not qualify for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s failings are the lack of earnings stability over the ten year period and the lack of earnings growth over the ten year period.  For the Enterprising Investor, the problem is the lack of earnings stability over the five year period.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Travelers Companies (TRV) and ModernGraham’s valuation of Aflac Inc. (AFL).  As for a valuation, the company does appear to be undervalued currently, having grown its EPSmg (normalized earnings) from -$1.83 in 2009 to $1.74 for 2013.  This demonstrated level of growth surpasses the market’s implied estimate of 4.45% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price.

The Ugly (Speculative and Overvalued)

Mr. Market

  • Charles Schwab Corp (SCHW) – Charles Schwab Corp does not qualify for either the Defensive Investor or the Enterprising Investor due to insufficient earnings growth over the ten year historical period and the five year historical period, respectively.  The company needs to show further growth in the coming years in order to be more attractive as an investment opportunity.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Wells Fargo & Co. (WFC) and ModernGraham’s valuation of JP Morgan Chase (JPM).  From a valuation perspective, the company does not fare well at all, again as a result of the lack of earnings growth.  EPSmg (normalized earnings) have dropped from $0.82 in 2009 to $0.68 in 2013, a demonstrated performance that does not support the market’s implied estimate of 16.65% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below a margin of safety relative to the market price.

 

  • Nasdaq OMX Group (NDAQ) – Nasdaq OMX Group does not satisfy the requirements of either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the turn offs are the poor current ratio, the lack of earnings stability over the ten year period, and the lack of a long enough dividend history.  For the Enterprising Investor, the company fails because of the high level of debt relative to the current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities, through a review of ModernGraham’s valuation of Intercontinental Exchange Group (ICE).  From a valuation perspective, the company appears to be overvalued, after growing its EPSmg (normalized earnings) from $1.69 in 2009 to $2.06 in 2013.  This demonstrated level of growth does not support the market’s implied estimate of 4.86% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below a margin of safety relative to the price.

 

  • Omnicom Group Inc. (OMC) – Omnicom Group Inc. does not satisfy the requirements of either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the turn offs are the poor current ratio and the high PEmg and PB ratios.  For the Enterprising Investor, the company fails because of the high level of debt relative to the current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation perspective, the company appears to be overvalued, after growing its EPSmg (normalized earnings) from $2.76 in 2009 to $3.46 in 2013.  This demonstrated level of growth does not support the market’s implied estimate of 6.16% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below a margin of safety relative to the price.

 

  • Paccar Inc. (PCAR) – Paccar Inc. does not satisfy the requirements of either the Defensive Investor or the Enterprising Investor.  The company fails the Defensive Investor’s requirements due to the poor current ratio, lack of sufficient earnings growth over the last ten years, and the high PEmg and PB ratios.  For the Enterprising Investor, the company fails because of the high level of debt relative to the current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities, through a review of ModernGraham’s valuation of Ford Motor Company (F).  From a valuation perspective, the company appears to be overvalued, after growing its EPSmg (normalized earnings) from $2.23 in 2009 to $2.69 in 2013.  This demonstrated level of growth does not support the market’s implied estimate of 8.27% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below a margin of safety relative to the price.

 

  • Rowan Companies (RDC) – Rowan Companies is not suitable for either the Defensive Investor or the Enterprising Investor.  The company has not consistently paid a dividend over the last ten years, and has shown insufficient earnings growth over the ten year period for the Defensive Investor.  For the Enterprising Investor, the company’s lack of a dividend payment, high level of debt relative to the current assets, and insufficient earnings growth are all factors against the possibility of investment.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation side of things, the company does not fare well.  EPSmg (normalized earnings) have dropped from $3.46 in 2009 to $1.86.  The market is implying an estimate of 4.65% earnings growth going forward, but the recent history of the company does not support that estimate, leading the ModernGraham valuation model to return an estimate of intrinsic value that falls well below a margin of safety relative to the current price.

 

  • Teco Energy (TE) – Teco Energy is not currently suitable for either the Defensive Investor or the Enterprising Investor, but if it can demonstrate positive earnings for another year, it will qualify for both investor types next year.  As it stands now, though, the lack of earnings stability over the ten year period and the low current ratio eliminate it from the Defensive Investor’s list.  The high debt relative to current assets and the lack of earnings growth over the five year period eliminate it from the Enterprising Investor’s list.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation perspective, the company appears to be overvalued, having seen its EPSmg (normalized earnings) fall from $1.14 in 2009 to $1.08 for 2013.  This lack of growth does not support the market’s implied estimate of 3.57% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.

Disclaimer:  The author held a long position in The Walt Disney Company (DIS) and 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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