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10 Companies Benjamin Graham Would Invest In Today – February 2015

10 Ben Graham CompaniesOut of the multitude of companies, which ones would legendary value investor Benjamin Graham buy today?  I’ve compiled ten great companies that fit the ModernGraham criteria, based on Benjamin Graham’s methods. The companies in this list pass the rigorous requirements of either the Defensive Investor or the Enterprising Investor and are undervalued by the market. To find more companies that meet these tests, be sure to check out the ModernGraham Valuation Index.

B&G Foods Inc. (BGS)

bg-foods-logoB&G Foods Inc. qualifies for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the small size, low current ratio, short dividend history, and the high PEmg and PB ratios.  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 $0.49 in 2010 to an estimated $1.20 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 8.06% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (Read the full valuation)

CF Industries Holdings Inc. (CF)

CfindustrieslogoCF Industries Holdings is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor’s only concern is the lack of earnings stability over the last ten years while the Enterprising Investor is only concerned by the high 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 $7.10 in 2010 to an estimated $21.45 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 1.55% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (Read the full valuation)

Cummins Inc. (CMI)

Logo_cumminsCummins Inc. passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The only issue the Defensive Investor has with the company is the high PB ratio, while the Enterprising Investor has no initial concerns. 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, Cummins Inc. has grown its EPSmg (normalized earnings) from $3.83 in 2010 to $8.48 for 2014. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 3.81% over the next 7-10 years. In fact, the historical growth is around 24.2% 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 still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (Read the full valuation on Seeking Alpha)

Eastman Chemical Company (EMN)

200px-Eastman_Chemical_Company_logo.svgEastman Chemical qualifies for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor has no initial concerns while the Enterprising Investor is only slightly 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 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 $2.07 in 2010 to an estimated $5.65 for 2014.  This level of demonstrated growth is greater than 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.  (Read the full valuation)

Fifth Third Bancorp (FITB)

220px-Fifth_Third_Bank.svgFifth Third Bancorp performs well in the initial stages of the analysis for the Enterprising Investor, passing all of the requirements. Defensive Investors, however, are concerned by the insufficient earnings growth or stability over the last ten years. Therefore, only Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s teachings should feel 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 $0.01 in 2010 to an estimated $1.62 for 2014. This achieved growth rate is well above the market’s implied forecast of only 1.96% 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 the company is suitable for their own individual portfolios.  (Read 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.  (Read the full valuation on Seeking Alpha)

Helmerich & Payne (HP)

logo_HPIHelmerich & Payne Inc. is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned by the low level of earnings growth over the last ten years, while the Enterprising Investor has no initial concerns.  As a result, all 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 $3.24 in 2011 to an estimated $4.63 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.  (Read the full valuation)

Joy Global Inc. (JOY)

2012_JGI_logo_wikipediaJoy Global Inc. is suitable for both the Defensive Investor and the Enterprising Investor.  In fact, the company passes all of the requirements of both investor types, which is a rare accomplishment.  As a result, all 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 $3.89 in 2010 to $4.91 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 0.17% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (Read 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.  (Read the full valuation)

Wells Fargo & Company (WFC)

500px-Wells_Fargo_Bank.svgWells Fargo & Co. passes the initial requirements of the Enterprising Investor as well as the more conservative Defensive Investor. In fact, the company passes all of the requirements of both investor types, which is a rare accomplishment. 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 $1.83 in 2010 to $3.60 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 3.37% over the next 7-10 years. In fact, the historical growth is around 19.4% 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 still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (Read the full valuation on Seeking Alpha)

Disclaimer:  The author held a long position in 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 the Wikipedia or the individual company’s website; this article is not affiliated with the company in any manner.

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