17 Companies in the Spotlight This Week – 6/28/14
We evaluated 17 different companies this week to determine whether they are suitable for Defensive Investors, those unwilling to do substantial research, or Enterprising Investors, those who are willing to do such research.  We also put each company through the ModernGraham valuation model based on Benjamin Graham’s value investing formulas in order to determine an intrinsic value for each.  Here’s a summary of the ModernGraham Valuations.  To see a listing and screenings of all the valuations, be sure to sign up to be a premium subscriber!
The Elite (Defensive or Enterprising and Undervalued)
MTS Systems Corp (MTSC)
MTS Systems Corp qualifies for the Enterprising Investor but not the Defensive Investor, who is concerned with the small size of the company, the low current ratio, and the high PEmg and PB ratios.  The company passes all of the Enterprising Investor requirements, so the investor type does not have any major initial concerns.  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 General Electric (GE) and ModernGraham’s valuation of Illinois Tool Works (ITW).  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.63 in 2010 to an estimated $3.24 for 2014.  This level of demonstrated growth is stronger than the market’s implied estimate of 6.21% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price. (See the full valuation)
National Oilwell Varco (NOV)
National Oilwell Varco is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern is with the short dividend history and the company passes all of the Enterprising Investor’s requirements.  As a result, value 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 Baker Hughes Inc. (BHI) and ModernGraham’s valuation of Schlumberger Ltd (SLB).  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.88 in 2010 to an estimated $5.46 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 3.11% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price. (See the full valuation)
Olin Corp (OLN)
Olin Corp is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern at this point is the insufficient earnings growth over the last ten years, and the Enterprising Investor’s only issue is 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 feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.46 in 2010 to an estimated $1.96 for 2014.  This solid level of demonstrated growth is greater than the market’s implied estimate of 2.51% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price. (See the full valuation)
Oracle Corp (ORCL)
Oracle is suitable for the Enterprising Investor but does not qualify for the Defensive Investor, who is concerned with the short dividend history and the high PB ratio.  The company passes all of the Enterprising Investor’s requirements, though.  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 Hewlett Packard Co. (HPQ) and ModernGraham’s valuation of Microsoft Corp (MSFT).  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.06 in 2010 to $2.21 for 2014.  This demonstrated level of growth outpaces the market’s implied estimate of 4.99% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price. (See the full valuation)
Rockwell Automation (ROK)
Rockwell Automation is suitable for the Enterprising Investor but not the Defensive Investor, who has concerns with the high PEmg and PB ratios.  The Enterprising Investor does not have any primary issues with the company as it passes all of the 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 into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of Microsoft Corp (MSFT) and ModernGraham’s valuation of Honeywell International (HON).  From a valuation perspective, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.91 in 2010 to an estimated $5.29 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 7.52% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price. (See the full valuation)
Viacom Inc. (VIAB)
Viacom is suitable for the Enterprising Investor but not the Defensive Investor, who has concerns with the poor current ratio, short dividend and high PB ratio.  The Enterprising Investor’s only issue with the company is the level of debt relative to net 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 including a review of ModernGraham’s valuation of Time Warner (TWX) and ModernGraham’s valuation of Comcast (CMCSA).  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 level of demonstrated growth outpaces the market’s implied estimate of 4.94% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price. (See the full valuation)
Western Digital Corp (WDC)
Western Digital Corp is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern is the short dividend history while the company passes all of the Enterprising Investor’s requirements.  As a result, value 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.  From a valuation side of things, the company appears significantly undervalued after growing its EPSmg (normalized earnings) from $3.75 in 2010 to an estimated $5.83 for 2014.  This strong level of demonstrated growth outpaces the market’s implied estimate of 3.63% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price. (See the full valuation)
The Good (Defensive or Enterprising and Fairly Valued)
J.M. Smucker Company (SJM)
J.M. Smucker Company qualifies for the Enterprising Investor but not the Defensive Investor, who has concerns with the low current ratio and the high PEmg ratio.  The Enterprising Investor’s only issue is with the high level of debt relative to the net 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 General Mills (GIS).  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.36 in 2010 to $4.78 in 2014.  This level of demonstrated growth supports the market’s implied estimate of 6.77% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price. (See the full valuation)
Medtronic Inc. (MDT)
Medtronic is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only major concern with the company is the high PB ratio, while the company passes all of the Enterprising Investor’s requirements.  As a result, value 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 Johnson & Johnson (JNJ) and ModernGraham’s valuation of C.R. Bard (BCR).  As for the valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.30 in 2010 to $3.38 for 2014.  This demonstrated level of growth supports the market’s implied estimate of 5.19% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value within a margin of safety relative to the market price. (See the full valuation)
The Mediocre (Defensive or Enterprising and Overvalued)
Linear Technology Corp (LLTC)
Linear Technology qualifies for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor has concerns with the low level of earnings growth over the last ten years, as well as the high PEmg and PB ratios.  In contrast, 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 comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Analog Devices Inc. (ADI) and ModernGraham’s valuation of Texas Instruments (TXN).  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) grow from $1.52 in 2010 to only an estimated $1.87 for 2014.  This low level of demonstrated growth does not support the market’s implied estimate of 8.51% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value falling below the price. (See the full valuation)
Michael Kors Holdings Ltd (KORS)
Michael Kors Holdings is not suitable for the Defensive Investor but does qualify for the Enterprising Investor.  The company’s short history eliminates it from contention for the Defensive Investor, but the Enterprising Investor’s only concern is with 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 into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Ralph Lauren (RL) and ModernGraham’s valuation of Coach Inc. (COH).  From a valuation side of things, the company appears overvalued despite growing its EPSmg (normalized earnings) from $0.06 in 2010 to $1.78 for 2014.  This strong level of demonstrated growth does not quite support the market’s implied estimate of 20.58% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value well below the market price. (See the full valuation)
Monsanto Company (MON)
Monsanto qualifies for the Enterprising Investor but not the Defensive Investor, who has concerns with the high PEmg and PB ratios.  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 comfortable proceeding with further research into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of E I Du Pont de Nemours (DD) and ModernGraham’s valuation of The Dow Chemical Company (DOW).  From a valuation side of things, the company appears to be overvalued despite growing its EPSmg (normalized earnings) from $2.70 in 2010 to an estimated $4.23 for 2014.  This level of demonstrated growth does not quite support the market’s implied estimate of 10.73% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price. (See the full valuation)
National Presto Industries (NPK)
National Presto Industries qualifies for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only major concern with the company is the fact that it is smaller than the investor type’s requirement, while the company passes all of the Enterprising Investor’s requirements.  As a result, value 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.  As for the valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $7.84 in 2010 to only an estimated $6.18 for 2014.  This demonstrated drop in earnings does not support the market’s implied estimate of 1.6% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value falling well below the market price. (See the full valuation)
The Bad (Speculative and Undervalued or Fairly Valued)
The Ugly (Speculative and Overvalued)
Mondelez International (MDLZ)
Mondelez is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor has major concerns with the low current ratio, the lack of sufficient earnings growth over the last ten years, and the poor PEmg and PB ratios.  The Enterprising Investor also has concerns with the 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 through a review of ModernGraham’s valuation of Pepsico (PEP) and ModernGraham’s valuation of General Mills (GIS).  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.60 in 2010 to an estimated $1.44 for 2014.  This demonstrated drop in earnings does not support the market’s implied estimate of 8.70% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the market price. (See the full valuation)
NiSource Inc. (NI)
NiSource Inc. does not satisfy either the Defensive Investor or the Enterprising Investor’s requirements.  The Defensive Investor has concerns with the low current ratio, and the poor PEmg and PB ratios while the Enterprising Investor is concerned with 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 explore other opportunities.  From a valuation perspective, the company appears to be significantly overvalued after seeing its EPSmg (normalized earnings) grow from $1.07 in 2010 to only an estimated $1.46 for 2014.  This low level of demonstrated growth does not support the market’s implied estimate of 8.94% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price. (See the full valuation)
Public Service Enterprise Group (PEG)
Public Service Enterprise Group does not satisfy either the Defensive Investor or the Enterprising Investor’s requirements.  The Defensive Investor has concerns with the low current ratio, and the insufficient earnings growth over the last ten years.  The Enterprising Investor is concerned with the 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 perspective, the company appears to be significantly overvalued after seeing its EPSmg (normalized earnings) drop from $2.69 in 2010 to only an estimated $2.60 for 2014.  This demonstrated drop in earnings does not support the market’s implied estimate of 3.33% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price. (See the full valuation)
Disclaimer:  The author held a long position in Apple Inc. (AAPL), Deere & Co. (DE), and Dover Corp (DOV), 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.
