We evaluated 15 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)
Cognizant Technology Solutions (CTSH)
Cognizant Technology Solutions fares quite well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the lack of dividends along with the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned by the lack of dividends. 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 $0.88 in 2010 to an estimated $2.01 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for 9.24% earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 25.6% 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 may be unrealistic that the company would see such a significant slowdown in growth over the long term. Therefore, the model returns an estimate of intrinsic value above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation on Seeking Alpha)
FedEx Corporation (FDX)
FedEx Corporation does fairly well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the low current ratio and the high PEmg and PB ratios, while the Enterprising Investor is only concerned by the high level of debt relative to the net current assets. 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 $3.50 in 2011 to an estimated $6.69 for 2015. This is a very strong level of demonstrated growth which is well above the market’s implied estimate of 8.76% annual earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 18.26% per year, which is clearly unsustainable over a long period of time. As a result, the ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur. A significant slowdown would have to occur to justify a price as low as the market is demonstrating. 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)
Harley Davidson Inc. (HOG)
Harley Davidson fares quite well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last ten years, and the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned by the level of debt relative to the net current assets. 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 $1.46 in 2010 to an estimated $3.06 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for 6.33% earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 21.93% 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 may be unrealistic that the company would see such a significant slowdown in growth over the long term. Therefore, the model returns an estimate of intrinsic value above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation on Seeking Alpha)
Michael Kors Holdings Limited (KORS)
Michael Kors Holdings Limited qualifies for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the insufficient earnings stability, short earnings history, lack of dividends, and the high PEmg and PB ratios.  The Enterprising Investor is only concerned by the lack of dividends.  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.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.19 in 2011 to an estimated $2.75 for 2015.  This level of demonstrated growth is greater than the market’s implied estimate of 9.21% 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)
Oracle Corporation (ORCL)
Oracle performs quite well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the short dividend history and 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 a loss of $1.29 in 2011 to an estimated gain of $2.41 for 2015. This is a very strong level of demonstrated growth which is well above the market’s implied estimate of only 5.39% annual earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 17.23% per year, which is clearly unsustainable over a long period of time. As a result, the ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur. A significant slowdown would have to occur to justify a price as low as the market is demonstrating. 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)
Tyson Foods Inc. (TSN)
Tyson Foods Inc. qualifies for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the low current ratio, and the insufficient earnings stability over the last ten years.  The Enterprising Investor is only concerned by 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 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 $0.40 in 2010 to $2.07 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 5.46% 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)
Illinois Tool Works (ITW)
Illinois Tool Works should satisfy the Enterprising Investor, but not the Defensive Investor. The Defensive Investor is concerned with the high PEmg and PB ratios, while the Enterprising Investor is only concerned by the 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 $2.73 in 2010 to an estimated $4.50 for 2014. This is very strong and an impressive level of demonstrated growth which is in line with the market’s implied estimate for earnings growth of 6.54% over the next 7-10 years. In fact, actual historical growth is about 13% per year, so the market has priced in an earnings drop to a more sustainable level over the long term. 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)
Mastercard Inc. (MA)
Mastercard should satisfy the Enterprising Investor, but not the Defensive Investor. The Defensive Investor is concerned with the low current ratio, lack of earnings stability over the last ten years, short dividend history, and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns about the company. 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 $0.84 in 2010 to an estimated $2.42 for 2014. This is very strong and an impressive level of demonstrated growth which is in line with the market’s implied estimate for earnings growth of 13.6% over the next 7-10 years. In fact, actual historical growth is about 37.62% per year, so the market has priced in a slight earnings drop to a more sustainable level over the long term. 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)
Medtronic Inc. (MDT)
Medtronic should satisfy the Enterprising Investor, but not the Defensive Investor. The Defensive Investor is concerned with the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns about the company. 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 $2.49 in 2011 to an estimated $3.45 for 2015. This is a very strong and impressive level of demonstrated growth, which is in line with the market’s implied estimate for earnings growth of 6.52% over the next 7-10 years. In fact, actual historical growth is about 7.77% per year, so the market has priced in a slight earnings drop to a more sustainable level over the long term. 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)
W.W. Grainger Inc. (GWW)
W.W. Grainger Inc. qualifies for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the high PEmg and PB ratios.  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.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $5.94 in 2010 to an estimated $10.63 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 7.88% 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)
The Mediocre (Defensive or Enterprising and Overvalued)
Altera Corporation (ALTR)
Altera Corporation is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the short dividend history as well as the high PEmg and PB ratios. 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 overvalued after growing its EPSmg (normalized earnings) from $1.46 in 2010 to only an estimated $1.68 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 6.81% 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)
Jacobs Engineering Group (JEC)
Jacobs Engineering Group is suitable for the Enterprising Investor, but not the Defensive Investor, who is concerned with the low current ratio, and the lack of dividends. The Enterprising Investor, on the other hand, is only concerned with the lack of dividends. 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 $2.61 in 2010 to only $2.75 for 2014. This demonstrated growth does not support the market’s implied estimate of 3.69%. In fact, the demonstrated growth over the last several years is only 1.11% 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)
Leggett & Platt Inc. (LEG)
Leggett & Platt is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, lack of earnings stability over the last ten years, and the high PEmg and PB ratios.  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.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.79 in 2010 to an estimated $1.51 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 9.65% 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)
Symantec Corporation (SYMC)
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, short dividend history, insufficient earnings stability, and high PB ratio, while the Enterprising Investor has concerns with the high level of debt relative to the net 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 a loss of $1.05 in 2011 to an estimated gain of $1.44 for 2015. This level of demonstrated growth is fairly strong, and significantly higher than the market’s implied estimate of only 4.93%. As a result, Symantec Corporation appears to be significantly undervalued at the present time.  (See the full valuation on Seeking Alpha)
The Ugly (Speculative and Overvalued)
Emerson Electric Company (EMR)
Emerson Electric Company does not qualify for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and high PEmg and PB ratios. The Enterprising Investor takes issue with the level of debt relative to the current assets. As a result, any purchase of the company 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 $2.67 in 2010 to only $2.91 for 2014. This level of demonstrated growth does not support the market’s implied estimate for earnings growth of 6.42% over the next 7-10 years. In fact, actual growth has been closer to 1.78% in recent 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)
Disclaimer:Â 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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