5 Undervalued Dow Components to Research – December 2014
There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five most undervalued Dow Components reviewed by ModernGraham which are suitable for the Defensive Investor or the Enterprising Investor according to the ModernGraham approach. This is a sample of the types of screens included in ModernGraham Stocks & Screens, which is available for premium subscribers.  Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk. Each company suitable for the Defensive Investor is also suitable for Enterprising Investors.
Be sure to check out the history of this screen, including the companies which have been chosen in the past.
JP Morgan Chase (JPM)
JPMorgan 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)
Chevron Corp (CVX)
Chevron Corporation passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern is the low current ratio while the Enterprising Investor is willing to overlook concerns because the company passes the more conservative Defensive Investor requirements. As a result, all 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 $8.58 in 2010 to an estimated $11.38 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of 0.81% over the next 7-10 years. In fact, the historical growth is around 6.53% 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, 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)
Intel Corp (INTC)
Intel Corporation passes the initial requirements of the Enterprising Investor, but does not quite qualify for the Defensive Investor. The Defensive Investor is concerned with the low current ratio along with the high PB ratio, 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 $1.27 in 2010 to an estimated $2.12 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of 3.91% over the next 7-10 years. In fact, the historical growth is around 13.27% 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)
American Express Company (AXP)
Enterprising Investors following the ModernGraham approach should keep a keen eye on American Express and pour some time into conducting further research. The Defensive Investor may not feel the same way, with concerns regarding the high PB ratio. However, Enterprising Investors have no initial concerns, and 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 $2.64 in 2010 to an estimated $4.67 for 2014. This is a high level of growth, approximately 15% 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 11.5%, which is well below the market’s implied forecast of only 5.15% earnings growth over the next 7-10 years. 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. Enterprising Investors are therefore encouraged to proceed with further research to determine whether American Express is suitable for their own individual portfolios. (See the full valuation on Seeking Alpha)
The Boeing Company (BA)
Boeing Company should be attractive to the Enterprising Investor as the only concern for the investor type is the low current ratio. However, the Defensive Investor should not be so thrilled with the company due to the high PEmg and PB ratios. 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, while Defensive Investors consider other opportunities.
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 $3.60 in 2010 to an estimated $6.35 for 2014. This is a very strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of 5.87% over the next 7-10 years. In fact, the historical growth is around 15.26% per year, so the market is expecting a very significant drop in earnings growth. Even after the ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, the model 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)
What do you think?  Are these companies a good value for Defensive Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: Â The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing those holdings within the next 72 hours. Â Company logos were taken from Wikipedia; ModernGraham has no affiliation with any of the companies mentioned.
