Feature Value Investing Weekly

16 Companies in the Spotlight This Week – 4/26/14

image (7)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 250 companies in the database to find 5 Low PEmg Companies for the Defensive 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)

  • 200px-American_Express_logo.svgAmerican Express Company (AXP) – American Express is a great company for Enterprising Investors to look at in more detail, but it does not quite qualify for the Defensive Investor because its PB ratio is too high.  That said, the company passes all of the requirements of the Enterprising Investor.  As a result, Enterprising 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 competitors through a review of ModernGraham’s valuation of Visa (V) and ModernGraham’s valuation of Capital One Financial (COF).  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.68 in 2010 to an estimated $4.63 for 2014.  This solid level of demonstrated growth surpasses the market’s implied estimate of 5.11% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

 

  • 500px-Time_Warner_wordmark.svgTime Warner Inc. (TWX) – Time Warner Inc. qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the low current ratio, high PEmg ratio, and the insufficient earnings stability or growth over the ten year period.  The Enterprising Investor’s only concern 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 its competitors through a review of ModernGraham’s valuation of Viacom (VIAB) and ModernGraham’s valuation of CBS Corporation (CBS).  From a valuation side of things, the company appears to be undervalued after having grown its EPSmg (normalized earnings) from -$1.16 in 2009 to $3.04 for 2013.  This solid level of growth outpaces the market’s implied estimate of 6.55% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price.

The Good (Defensive or Enterprising and Fairly Valued)

  • Quest Diagnostics Inc. (DGX) – Quest Diagnostics Inc. is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern is the low current ratio, and while the Enterprising Investor is concerned with the level of debt relative to the current assets, he is satisfied by default since the company qualifies for Defensive Investors.  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 its competitors through a review of Psychemedics Corp (PMD) and 5 Outstanding Dow Components.  From a valuation side of things, the company appears to be fairly valued presently, having grown its EPSmg (normalized earnings) from $3.32 in 2009 to $4.20 in 2013.  This demonstrated level of growth supports the market’s implied estimate of 2.7% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a safety margin relative to the price.

 

  • Xilinx Inc. (XLNX) – Xilinx Inc. is suitable for the Enterprising Investor but not the Defensive Investor.  The company passes all of the requirements of the Enterprising Investor but its PEmg and PB ratios are too high for the Defensive Investor.  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 such as through a comparison to ModernGraham’s valuation of International Business Machines (IBM) or ModernGraham’s valuation of Qualcomm Inc. (QCOM).  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.25 in 2010 to an estimated $1.98 for 2014.  This level of demonstrated growth is in line with the market’s implied estimate of 8.91% 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)

  • 3M Corp (MMM) – 3M Company is suitable for Enterprising Investors but not Defensive Investors.  The Defensive Investor is concerned with the low current ratio and high PEmg and PB ratios, but the company passes all of the requirements of the Enterprising Investor.  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 comparison to other opportunities such as through a review of ModernGraham’s valuation of Honeywell International (HON) and ModernGraham’s valuation of Hewlett-Packard Co. (HPQ).  From a valuation perspective, the company appears to be overvalued presently, after growing its EPSmg (normalized earnings) from $4.88 in 2009 to $6.17 for 2013.  This level of demonstrated growth, while fairly strong, does not support the market’s implied estimate of 6.91% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.

 

  • Archer Daniels Midland (ADM) – Archer Daniels Midland is suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the only concern is the low current ratio, and the Enterprising Investor’s concern is the lack of earnings growth over the last five years.  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 comparison to other opportunities through a review of 5 Undervalued Companies for the Defensive Investor.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $2.66 in 2009 to $2.36 for 2013.  This lack of demonstrated growth does not support the market’s implied estimate of 5.28% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below the market price.

 

  • Becton Dickinson and Co. (BDX) – Becton Dickinson is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the company’s high PEmg and PB ratios, but the company passes all 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 the company and comparison to other opportunities through a review of ModernGraham’s valuation of Covidien (COV).  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $4.48 in 2010 to only an estimated $5.44 for 2014.  This low level of demonstrated growth does not support the market’s implied estimate of 6.18% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.

 

  • Ensco PLC (ESV) – Ensco is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern is the low current ratio, but the company passes all of the other requirements.  The Enterprising Investor has some concerns, but since the company is suitable for Defensive Investors it is by default also suitable for Enterprising Investors.  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 comparison to other opportunities while keeping in mind the 7 Key Tips to Value Investing.  From a valuation perspective, the company does not fare very well after seeing a drop in EPSmg (normalized earnings) from $6.13 in 2009 to $4.91 for 2013.  This lack of demonstrated earnings growth does not support the market’s implied estimate of 0.8% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well below the market price.

 

  • Priceline Group (PCLN) – Priceline qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor’s concerns are numerous and include the insufficient earnings stability over the ten year period, the lack of dividend payments, and the high PEmg and PB ratios.  The Enterprising Investor is only concerned about the lack of dividend payments.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research.  From a valuation perspective, the company appears to be overvalued presently despite showing astronomical growth in EPSmg (normalized earnings) from $5.53 in 2009 to $25.58 for 2013.  This high level of demonstrated growth is impressive and outpaces the market’s implied estimate of 19.62%, but the ModernGraham growth estimate is capped at 15% in order to institute a safety margin, and the ModernGraham valuation model has therefore returned an estimate of intrinsic value that falls below the market price.

 

  • United Parcel Service (UPS) – United Parcel Service qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios, and the insufficient earnings growth over the ten year period.  The Enterprising Investor’s only concern 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 its competitors through a review of ModernGraham’s valuation of Fedex Corp (FDX).  From a valuation side of things, the company appears to be overvalued after having grown its EPSmg (normalized earnings) from $2.32 in 2009 to only $3.13 for 2013.  This low level of growth does not support the market’s implied estimate of 11.53% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is below the market price.

The Bad (Speculative and Undervalued or Fairly Valued)

  • Philip Morris International (PM) – Philip Morris International does not qualify for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the concerns are the low current ratio and the negative book value.  For the Enterprising Investor, the issue is the high level of debt relative to current assets.  Until the balance sheet improves, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.11 in 2009 to $4.87 for 2013.  This demonstrated level of growth is greater than the market’s implied estimate of 4.33% and leads the ModernGraham valuation model to return an estimate of intrinsic value that surpasses the market price.

The Ugly (Speculative and Overvalued)

Mr. Market

  • Crown Castle International (CCI) – Crown Castle International does not qualify for either the Defensive Investor or the Enterprising Investor.  In fact, the only requirement of the Defensive Investor which the company passes is the size requirement.  For the Enterprising Investor, the company passes both the earnings growth requirement and dividend payment requirement.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation perspective, the company needs to show continued positive earnings before its valuation will be attractive.  As it stands, the company has grown its EPSmg (normalized earnings) from -$0.58 in 2009 to $0.18 for 2013, which is a strong level of growth; however, since the current year’s EPSmg is only $0.18, the ModernGraham valuation model has returned an estimate of intrinsic value that is well below the market price.

 

  • Edison International (EIX) – Edison International is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s concerns are the low current ratio, the lack of sufficient earnings stability or growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor has an issue with the high level of debt relative to the current assets, the lack of earnings growth and the lack of earnings stability.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of 5 Undervalued Companies for the Enterprising Investor.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $3.17 in 2009 to $2.76 for 2013.  This demonstrated drop in earnings does not support the market’s implied estimate of 6.01% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the price.

 

  • FirstEnergy Corp. (FE) – FirstEnergy is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s concerns are the low current ratio and the lack of sufficient earnings growth over the last ten years.  The Enterprising Investor has an issue with the high level of debt relative to the current assets and the lack of earnings growth over the last five years.  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 seeing its EPSmg (normalized earnings) drop from $3.79 in 2009 to $1.79 for 2013.  This demonstrated drop in earnings does not support the market’s implied estimate of 5.27% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the price.

 

  • Newmont Mining Corp (NEM) – Newmont Mining Corp is unsuitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the concerns are with the low current ratio, insufficient earnings growth or stability over the last ten years, and the high PEmg ratio.  The Enterprising Investor is concerned with the high level of debt relative to its current assets along with the lack of earnings stability or growth over the five year period.  Consequently, value investors seeking to follow the ModernGraham approach should explore other opportunities.  From a valuation side of things, the company appears significantly overvalued, having seen a drop in its EPSmg (normalized earnings) from $1.26 in 2009 to $0.31 for 2013.  This demonstrated earnings history certainly does not support the market’s implied estimate of 33.15% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below the market price.

 

  • Red Hat Inc. (RHT) – Red Hat Inc. does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the lack of dividend payments, the low current ratio, and the high PEmg and PB ratios.  The Enterprising Investor has an issue with the low current ratio and lack of dividend payments.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should research other opportunities through a review of ModernGraham’s analysis of Microsoft Corp (MSFT) and ModernGraham’s analysis of Oracle Corp (ORCL).  As for a valuation, the company appears to be overvalued presently, having grown its EPSmg (normalized earnings) from $0.38 in 2010 to only $0.92 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 23.55% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the 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.

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