Feature Value Investing Weekly

22 Companies in the Spotlight This Week – 11/29/14

image (7)We evaluated 22 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)

CA Inc. (CA)

500px-CA_Technologies_brand.svgCA Inc. is suitable for the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the low current ratio, while the Enterprising Investor is willing to overlook concerns since the company qualifies for the more conservative Defensive Investor.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.33 in 2011 to an estimated $2.10 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 3.05% 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)

Dover Corporation (DOV)

Dover-co-logoDover Corporation passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern is the high PB ratio, while the Enterprising Investor is only worried about the level of debt relative to the net current assets. As a result, value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $2.98 in 2010 to an estimated $4.88 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of 4.2% over the next 7-10 years. In fact, the historical growth is around 12.7% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

Ford Motor Company (F)

500px-Ford_Motor_Company_Logo.svgFord continues to fare very well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the lack of earnings stability over the last ten years and the inconsistent dividend record over that time period, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $1.15 in 2010 to an estimated gain of $1.87 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings loss of 0.1% over the next 7-10 years. It is true that the company has seen somewhat flat EPSmg over the last couple of years, but it is critical for investors to have a longer frame of reference when considering a company’s long-term prospects. Here, the historical growth in EPSmg over the last five years is around 52.53% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but it is unrealistic that a company this strong would see negative growth over the long-term. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation on Seeking Alpha)

Franklin Resources Inc. (BEN)

Franklin_Resources_LogoFranklin Resources qualifies for the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the high PB ratio, but the Enterprising Investor has no initial concerns.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.91 in 2010 to $3.28 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 4.44% 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)

JP Morgan Chase (JPM)

500px-J_P_Morgan_Chase_Logo_2008_1.svgJPMorgan Chase performs extremely well in the initial stages of the analysis, passing all of the requirements of both the Enterprising Investor and the Defensive Investor. Any value investor following the ModernGraham approach based on Benjamin Graham’s teachings should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

To determine an estimate of the intrinsic value, one must consider the company’s earnings. Here, the company has grown its EPSmg (normalized earnings) from $3.05 in 2010 to an estimated $4.83 for 2014. This is a strong level of growth, approximately 11.66% each year. Even adjusting for a margin of safety to assume the company will not do as well in the future, a conservative growth estimate may be around 8.74%, which is well above the market’s implied forecast of only 2.01% earnings growth over the next 7-10 years. The company would have to see a significant slowdown in growth in order to be valued at the market’s current price. As a result, the ModernGraham valuation model returns an estimate of intrinsic value well above the price, supporting a clear conclusion that the company is significantly undervalued. All value investors are therefore encouraged to proceed with further research to determine whether JPMorgan Chase is suitable for their own individual portfolios.  (See the full valuation on Seeking Alpha)

MeadWestvaco Co. (MWV)

MeadWestvaco_logoMeadWestvaco Co. is suitable for the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the low current ratio, and the Enterprising Investor is also 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 feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.90 in 2010 to an estimated $2.31 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 5.48% 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)

Seagate Technology plc (STX)

220px-Seagate_logo.svgSeagate Technology is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the lack of earnings or dividend stability over the last ten years as well as the high PB ratio, while the Enterprising Investor is only concerned by the level of debt relative to the net 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 and comparing the company to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.34 in 2011 to an estimated $4.72 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 2.77% 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)

Akamai Technologies Inc. (AKAM)

Akamai Technologies qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the lack of dividend payments as well as the high PEmg and PB ratios, while the Enterprising Investor is only concerned by the lack of dividend payments.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.76 in 2010 to an estimated $1.66 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 14.99% 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)

Baxter Corporation (BAX)

After reviewing the data, Baxter should satisfy the Enterprising Investor, but not the Defensive Investor. The Defensive Investor is concerned with the low current ratio as well as the high PB ratio, while the Enterprising Investor’s only issue with the company is the high level of debt relative to the net current assets. Therefore, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $2.88 in 2010 to an estimated $4.11 for 2014. This is a fairly strong level of demonstrated growth which is in line with the market’s implied estimate for earnings growth of 4.55% over the next 7-10 years. The ModernGraham valuation model therefore returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating the company is fairly valued at the present time.  (See the full valuation on Seeking Alpha)

The Mediocre (Defensive or Enterprising and Overvalued)

Bemis Company Inc. (BMS)

Bemis Company Inc. qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is concerned with the level of earnings growth over the last ten years, while the Enterprising Investor is only concerned with the level of debt relative to the net 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 and comparing the company to other opportunities.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.65 in 2010 to only an estimated $2.04 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 5.47% 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)

Broadcom Corporation (BRCM)

After looking over the company’s fundamentals, Broadcom does not qualify for the Defensive Investor as there are concerns regarding the company’s short dividend history and high PEmg and PB ratios. In contrast, the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

Estimating the intrinsic value requires examining the company’s earnings history. Broadcom has seen its EPSmg (normalized earnings) grow from $0.87 in 2010 to only an estimated $1.33 for 2014. This level of demonstrated earnings does not support the market’s implied estimate of 11.6% earnings growth. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the market price at this time, and the company appears to be overvalued by the market.  (See the full valuation on Seeking Alpha)

Cerner Corporation (CERN)

After looking over the company’s fundamentals, Cerner qualifies for the Enterprising Investor, as the investor type’s only concern is the lack of dividend payments. As for the Defensive Investor, there are numerous concerns including the lack of dividends, along with the high PEmg and PB ratios. As a result, only Enterprising Investors should feel comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

Estimating the intrinsic value requires examining the company’s earnings history. Cerner has grown its EPSmg (normalized earnings) from $0.58 in 2010 to only an estimated $1.24 for 2014. This demonstrated level of earnings growth does not support the market’s implied estimate of 21.41% earnings growth. In recent years, the company has seen an average annual growth in earnings of around 23.15%. However, such a high rate is not sustainable for a long period of time, and value investors who are conservative by nature will be very cautious regarding an earnings growth estimate. The ModernGraham model limits the growth to only 15% to create an additional safety margin. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the market price at this time, and the company appears to be overvalued by the market.  (See the full valuation on Seeking Alpha)

Diamond Offshore Drilling Inc. (DO)

Diamond Offshore Drilling qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is concerned with the level of earnings growth over the last ten years, while the Enterprising Investor is willing to overlook concerns with growth and debt levels because the company passes the more conservative Defensive Investor requirements.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be overervalued after seeing its EPSmg (normalized earnings) drop from $7.97 in 2010 to only an estimated $4.43 for 2014.  This level of demonstrated growth does not even support the market’s implied estimate of an annual drop of 0.13% in earnings 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)

Facebook Inc. (FB)

Facebook is suitable for the Enterprising Investor, but not the Defensive Investor, who is concerned with the short earnings history, lack of dividend payments and the high PEmg and PB ratios. The Enterprising Investor’s only issue with the company is the lack of dividend payments. As a result, the Enterprising Investor should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

From a valuation side of things, it is important to consider the company’s demonstrated growth in comparison to the market’s implied estimate for future growth. In this case, the company has grown its EPSmg (normalized earnings) from $0.11 in 2010 to an estimated $0.77 for 2014. While this demonstrated growth is strong, it does not support the market’s implied estimate of 44.04%. Such a high growth rate is most likely unsustainable, and conservative investors will be very hesitant to proceed with using any rate that high. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the market price at this time, and the company appears to be overvalued by the market.  (See the full valuation on Seeking Alpha)

International Flavors & Fragrances (IFF)

International Flavors & Fragrances qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be overervalued after growing its EPSmg (normalized earnings) from $2.86 in 2010 to an estimated $4.09 for 2014.  This level of demonstrated growth does not quite support the market’s implied estimate of 7.99% 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)

Johnson & Johnson (JNJ)

Johnson & Johnson is suitable for the Enterprising Investor but not the Defensive Investor, who is concerned with the high PEmg and PB ratios. The Enterprising Investor, on the other hand, has no initial concerns with the company. As a result, the Enterprising Investor should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $4.41 in 2010 to only an estimated $4.81 for 2014. This demonstrated growth does not support the market’s implied estimate of 6.87%. In fact, the demonstrated growth over the last several years is only 1.79% per year. The company would have to see a significant change in its level of growth in order to meet the market’s estimated growth level. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the market price at this time, and the company appears to be overvalued by the market.  (See the full valuation on Seeking Alpha)

The Bad (Speculative and Undervalued or Fairly Valued)

AutoNation Inc. (AN)

AutoNation Inc. is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the low current ratio, lack of earnings stability over the last ten years, lack of dividends and the high PEmg and PB ratios.  The Enterprising Investor is concerned by the level of debt relative to the current assets along with the lack of dividends.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $0.35 in 2010 to an estimated gain of $2.77 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 6.23% 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)

CVS Health Corp (CVS)

As shown by the data, it is clear that conservative value investors may wish to seek other opportunities. The Defensive Investor is concerned with the low current ratio in combination with the high PEmg and PB ratios, while the Enterprising Investor has concerns with the high level of debt relative to the current assets. As a result, both investor types would find the company to be too risky to proceed. That said, any investors willing to speculate about the future of the company may go ahead with the next step of the analysis, which is a determination of the company’s intrinsic value.

When calculating an estimate of intrinsic value, it is important to consider the historical earnings results along with the market’s implied estimate for future growth. Here, the company has grown its EPSmg (normalized earnings) from $2.31 in 2010 to an estimated $3.61 for 2014. This level of demonstrated growth is fairly strong, and is within a margin of safety relative to the market’s implied estimate of 8.35%. As a result, the company appears to be fairly valued at the present time.  (See the full valuation on Seeking Alpha)

Pinnacle West Capital Corporation (PNW)

After reviewing the data, it is clear that conservative value investors may wish to seek other opportunities. The Defensive Investor is concerned with the low current ratio, along with the lack of sufficient earnings growth over the last ten years, while the Enterprising Investor has concerns with the high level of debt relative to the current assets. As a result, both investor types would find the company to be too risky to proceed. That said, any investor willing to speculate about the future of the company may go ahead with the next step of the analysis, which is a determination of the company’s intrinsic value.

When calculating an estimate of intrinsic value, it is important to consider the historical earnings results along with the market’s implied estimate for future growth. Here, the company has grown its EPSmg (normalized earnings) from $2.37 in 2010 to an estimated $3.52 for 2014. This level of demonstrated growth is fairly strong, particularly for utilities which do not usually demonstrate significant growth, and is within a margin of safety relative to the market’s implied estimate of 4.55%. As a result, the company appears to be fairly valued at the present time.  (See the full valuation on Seeking Alpha)

The Ugly (Speculative and Overvalued)

Mr. Market

American Electric Power Company (AEP)

American Electric Power Company presents a speculative situation, as it does not qualify for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, and an insufficient level of earnings growth over the last ten years. The Enterprising Investor takes issue with the level of debt relative to the current assets. As a result, any purchase of American Electric Power Company stock is made with a speculative nature behind it. That said, any speculator interested in pursuing the company should still proceed to the next part of the analysis, which is a determination of the company’s intrinsic value.

With regard to that intrinsic value, the company has grown its EPSmg (normalized earnings) from $2.85 in 2010 to only an estimated $3.13 for 2014. This level of demonstrated growth does not support the market’s implied estimate for earnings growth of 4.86% over the next 7-10 years. The ModernGraham valuation model therefore returns an estimate of intrinsic value below the current price, indicating the company is overvalued at the present time.  (See the full valuation on Seeking Alpha)

Consol Energy Inc. (CNX)

Consol Energy does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the low current ratio, lack of earnings growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor is concerned by 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 at this time.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $2.14 in 2010 to only an estimated $1.82 for 2014.  This lack of demonstrated growth does not support the market’s implied estimate of 7.15% 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)

Exelon Corporation (EXC)

Exelon Corporation does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the low current ratio, and the lack of earnings growth over the last ten years.  The Enterprising Investor is concerned by 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 at this time.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $3.90 in 2010 to only an estimated $2.36 for 2014.  This lack of demonstrated growth does not support the market’s implied estimate of 3.31% 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)

Disclaimer: The author held a long position in Dover Corporation (DOV) 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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