16 Companies in the Spotlight this Week – 4/19/14

We looked at 16 different companies this week.  Here’s a summary of the ModernGraham Valuations.  For more detailed analysis, click on the name of the company.  Yesterday we also screened all 240 companies in the database to find 5 Undervalued Companies for the Enterprising Investor.  To see more screens of the valuations, be sure to sign up to be a premium subscriber of ModernGraham Stocks and Screens!

The Elite (Defensive or Enterprising and Undervalued)

• Covidien Ltd. (COV) - Covidien is suitable for the Enterprising Investor but not the Defensive Investor.  The company has shown insufficient earnings stability over the ten year period, does not have a long enough dividend history, and has a high PB ratio for the Defensive Investor.  For the Enterprising Investor, the only gripe is the high level of debt relative to the current assets, but that alone is not enough to eliminate the company from potential 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 and comparing it to competitors through a review of ModernGraham’s valuation of C.R. Bard (BCR) and ModernGraham’s valuation of Medtronic (MDT).  From a valuation perspective, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.18 in 2010 to an estimated $3.72 for 2014.  This demonstrated level of growth outpaces the market’s implied estimate of 5.03% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

 

• HCP Inc. (HCP) - HCP Inc. for now qualifies for the Enterprising Investor, which is a rather rare achievement for a REIT as normally the level of debt present eliminates them from contention.  In this case, though, the company’s current assets are high enough this quarter to push it into contention for investment.  For the Defensive Investor, the company’s PEmg ratio is too high and the current ratio is not high enough to overcome that burden.  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 and comparing it to other opportunities through a review of a Glance at the Dow and 5 Low PEmg Companies for the Defensive Investor.  From a valuation standpoint, the company appears to be undervalued, having grown its EPSmg (normalized earnings) from $0.57 in 2009 to $1.54 for 2013.  This demonstrated level of growth is above the market’s implied estimate of 8.9% earnings growth, and the ModernGraham valuation model has returned an estimate of intrinsic value that is higher than the market price.

The Good (Defensive or Enterprising and Fairly Valued)

• Nordstrom Inc. (JWN) - Nordstrom Inc. is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only gripe is the high PB ratio, and the Enterprising Investor’s only issue is the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company and comparing it to a competitor through a review of ModernGraham’s valuation of Macy’s Inc. (M) while keeping in mind the 7 Key Tips to Value Investing.  From a valuation perspective, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.20 in 2010 to $3.31 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 4.95% 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.

The Mediocre (Defensive or Enterprising and Overvalued)

• Dow Chemical Co. (DOW) - Dow Chemical is suitable for the Enterprising Investor but not the Defensive Investor.  The company has not shown sufficient earnings growth over the ten year period for the Defensive Investor and is trading at a high PEmg ratio.  The Enterprising Investor’s only complaint is the high level of debt relative to the current assets.  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 and comparing it to other opportunities through a review of ModernGraham’s valuation of Exxon Mobil (XOM) and ModernGraham’s valuation of Monsanto (MON).  From a valuation perspective, the company appears to be overvalued at the present time, having grown EPSmg (normalized earnings) from $1.66 in 2009 to only $2.00 for 2013.  This low level of demonstrated growth does not support the market’s implied estimate of 7.67% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is below the current price.

 

• Microchip Technology Inc. (MCHP) - Microchip Technology qualifies for the Enterprising Investor but not the Defensive Investor.  For the Defensive Investor, the company has shown insufficient earnings growth in the ten year historical period and trades at high PEmg and PB ratios.  However, the company passes all 5 of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into a company and its competitors including a review of ModernGraham’s valuation of Analog Devices, Inc. (ADI) and ModernGraham’s valuation of Texas Instruments (TXN).  From a valuation perspective, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.31 in 2010 to only an estimated $1.60 for 2014.  This low level of demonstrated growth does not support the market’s implied estimate of 10.58% 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)

• Carmax Inc. (KMX) - Carmax Inc. does not qualify for either the Defensive Investor or the Enterprising Investor.  The company’s lack of dividend payments and high PEmg and PB ratios are determining factors for the Defensive Investor.  The Enterprising Investor is concerned with the high level of debt relative to the current assets and the lack of dividend payments as well.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of 5 Outstanding Dow Components.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.83 in 2010 to $1.91 in 2014.  This solid level of demonstrated growth outpaces the market’s implied estimate of 7.39% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price.

 

• F5 Networks (FFIV) - F5 Networks is not suitable for either the Defensive Investor or the Enterprising Investor.  From the Defensive Investor’s angle, the company’s current ratio is too low, it does not pay dividends, and is trading at high PEmg and PB ratios.  The Enterprising Investor doesn’t care about the PEmg and PB ratios, but the current ratio is still too low and the lack of dividends is a concern.  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 Cisco Systems (CSCO) and ModernGraham’s valuation of Juniper Networks (JNPR).  As for a valuation, the company appears to be fairly valued currently, having grown its EPSmg (normalized earnings) from $1.28 in 2010 to an estimated $3.50 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 10.49% 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.

 

• Integrys Energy (TEG) - Integrys Energy does not qualify for either the Defensive Investor or the Enterprising Investor.  The company’s current ratio is too low and there has been insufficient earnings stability or growth over the ten year historical period for the Defensive Investor.  The Enterprising Investor is concerned with the high level of debt relative to the current assets and the lack of earnings growth over the five year period.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.34 in 2009 to $3.31 in 2013.  This solid level of demonstrated growth outpaces the market’s implied estimate of 5.03% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price.

 

• Interpublic Group of Companies (IPG) - Interpublic Group of Companies is not suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company has a poor current ratio, has shown insufficient earnings stability or growth over the ten year historical period, does not pay dividends, and is trading at a high PEmg ratio.  For the Enterprising Investor, the company has too much debt relative to its current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation standpoint, the company appears undervalued after having grown its EPSmg (normalized earnings) from $0.18 in 2009 to $0.71 for 2013.  This level of demonstrated growth outpaces the market’s implied estimate of 7.22% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price.

 

• O’Reilly Automotive (ORLY) - O’Reilly Automotive is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s issues with the company are the low current ratio, the lack of dividend payments, and the high PEmg and PB ratios.  The Enterprising Investor is concerned with 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 fairly valued, having grown its EPSmg (normalized earnings) from $1.78 in 2009 to $4.56 for 2013.  This very impressive level of demonstrated growth supports the market’s implied estimate of 11.31% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is within a margin of safety relative to the price.

 

• Valero Energy Corp (VLO) - Valero Energy Corp does not qualify for either the Defensive Investor or the Enterprising Investor.  The company’s current ratio is too low and there has been insufficient earnings stability or growth over the ten year historical period for the Defensive Investor.  The Enterprising Investor is concerned with low current ratio and the lack of earnings stability over the five year period.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.31 in 2009 to $3.57 in 2013.  This solid level of demonstrated growth outpaces the market’s implied estimate of 3.6% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price.

 

• Wisconsin Energy Corp (WEC) - Wisconsin Energy Corp is not suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s failings are its low current ratio and its high PEmg and PB ratios.  The Enterprising Investor is concerned about the high level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should research other opportunities.  From a valuation standpoint, the company appears to be fairly valued, having grown its EPSmg (normalized earnings) from $1.48 in 2009 to $2.26 in 2013.  This demonstrated growth supports the market’s implied estimate of 6.27% 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 market price.

The Ugly (Speculative and Overvalued)

• Noble Corporation plc (NE) - Noble Corporation is not suitable for either the Defensive Investor or the Enterprising Investor.  The company has a current ratio too low and has not paid dividends consistently for ten straight years, which when those two things are combined eliminates the company from contention for Defensive Investors.  As for the Enterprising Investor, the company’s level of debt is too high relative to its current assets and it has not shown sufficient growth over the last five years.  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 Ensco (ESV).  From a valuation perspective, the company’s lack of growth in EPSmg (normalized earnings), which have dropped from $5.04 in 2009 to $2.71 in 2013 is troubling.  The market is currently implying a growth rate of 1.22% in earnings, and even though that is low, it is not supported by the recent history.  The ModernGraham valuation model has accordingly returned an estimate of intrinsic value that falls well below the market price.

 

• PG&E Company (PCG) - PG&E is not suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company has a low current ratio, not a stable enough dividend history (the company did not pay a dividend in 2004), has not shown sufficient growth in earnings over the ten year period, and has a high PEmg ratio.  For the Enterprising Investor, the company holds too much debt relative to current assets, and has not shown growth in the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities for investment.  From a valuation standpoint, the lack of growth in EPSmg (normalized earnings) is very concerning as the demonstrated growth does not support the market’s implied estimate of 6.24% earnings growth.  The ModernGraham valuation model has indicated the intrinsic value is well below the market price at this time.

 

• Regeneron Pharmaceuticals (REGN) - Regeneron Pharmaceuticals is not suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company has shown insufficient earnings stability or growth over the ten year historical period, does not pay dividends, and is trading at a high PEmg ratio.  For the Enterprising Investor, the company’s lack of earnings stability and growth over the 5 year period is very concerning.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Amgen (AMGN) and ModernGraham’s valuation of Pfizer (PFE).  From a valuation standpoint, the company appears significantly overvalued despite growing its EPSmg (normalized earnings) from -$1.23 in 2009 to $2.29 for 2013.  This demonstrated level of growth still falls well below the market’s implied estimate of 59.11% earnings growth(!) and leads the ModernGraham valuation model to return an estimate of intrinsic value that is considerably lower than the market price.

 

• Spectra Energy Corp (SE) - Spectra Energy does not qualify for either the Defensive Investor or the Enterprising Investor.  The only requirement of the Defensive Investor that the company passes is the market size while the Enterprising Investor is concerned with the high level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.22 in 2009 to only $1.55 in 2013.  This low level of demonstrated growth does not support the market’s implied estimate of 8.24% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is below the market price.

Disclaimer:  The author did not hold a position in any of the 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.