The Best Value Stocks of the IT Hardware Industry – May 2015
While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the best value stocks of the IT Hardware industry, selecting the five most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.
Out of the more than 500 companies reviewed by ModernGraham, 30 were identified as being closely related to the financial services industry.  Of those, only three are suitable for the Defensive Investor, twenty are suitable for the Enterprising Investor, and the remaining seven are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 140.5% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 25.81.  The industry as a whole, therefore would appear to be overvalued, particularly in comparison to the market (see Mr. Market’s Mental State).
The Elite
The following companies have been rated as the most undervalued and suitable for either the Defensive Investor or the Enterprising Investor:
Seagate Technology (STX)
Seagate Technology does fairly well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the inconsistent dividend history, lack of earnings stability over the last ten years, 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 valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $0.34 in 2011 to an estimated $4.68 for 2015. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of only 2.27% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. 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)
KLA-Tencor Corporation (KLAC)
KLA-Tencor Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the lack of earnings stability over the last ten years along with the high PB ratio 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.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.70 in 2011 to an estimated $3.39 for 2015.  This level of demonstrated growth is greater than the market’s implied estimate of 5.02% 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)
TE Connectivity (TEL)
TE Connectivity Limited is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the low current ratio, the insufficient earnings stability over the last ten years, the short dividend history and the high PEmg ratio, 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 undervalued after growing its EPSmg (normalized earnings) from $0.57 in 2011 to an estimated $3.75 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 5.07% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.  (See the full valuation)
NetApp Inc. (NTAP)
NetApp does fairly well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the lack of dividend payments, 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 valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.09 in 2011 to an estimated $2.00 for 2015. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 5.2% annual earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 16.8% per year, which is clearly unsustainable over the long term. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur. 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)
Western Digital Corporation (WDC)
Western Digital does fairly 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 $3.71 in 2011 to an estimated $6.26 for 2015. This is a strong level of demonstrated growth which is well above the market’s implied estimate of 4.59% annual earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 13.8% per year. 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)
The Full List
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Clicking on the company name will take you to the company’s latest valuation.
| Ticker | Name with Link | Investor Type | Latest Valuation Date | MG Value | Recent Price | Price as a percent of Value | PEmg Ratio | Div. Yield |
| A | Agilent Technologies Inc. | E | 4/3/2015 | $23.39 | $42.61 | 182.17% | 21.31 | 0.94% |
| AAPL | Apple Inc. | S | 12/12/2014 | $215.50 | $132.04 | 61.27% | 23.58 | 1.58% |
| ADI | Analog Devices, Inc. | E | 3/16/2015 | $24.79 | $68.29 | 275.47% | 29.18 | #N/A |
| ALTR | Altera Corporation | E | 3/27/2015 | $22.56 | $47.86 | 212.15% | 28.32 | 1.50% |
| AMAT | Applied Materials, Inc. | E | 5/12/2015 | $5.61 | $20.34 | 362.57% | 26.42 | 1.97% |
| APH | Amphenol Corporation | E | 3/22/2015 | $55.18 | $57.65 | 104.48% | 30.34 | 0.87% |
| BRCM | Broadcom Corporation | E | 5/22/2015 | $29.02 | $57.15 | 196.93% | 36.17 | 0.98% |
| EMC | EMC Corporation | S | 9/18/2014 | $45.30 | $26.69 | 58.92% | 20.37 | 1.72% |
| EMR | Emerson Electric Co. | S | 12/18/2014 | $32.45 | $60.95 | 187.83% | 20.95 | 3.08% |
| FLIR | FLIR Systems, Inc. | E | 5/14/2015 | $13.50 | $31.07 | 230.15% | 21.73 | 1.42% |
| GLW | Corning Incorporated | E | 5/19/2015 | $1.15 | $21.13 | 1837.39% | 14.37 | 2.27% |
| GRMN | Garmin Ltd. | E | 3/13/2015 | $4.84 | $45.46 | 939.26% | 17.76 | 4.22% |
| HPQ | Hewlett-Packard Company | S | 1/29/2015 | $0.00 | $33.78 | N/A | 34.47 | 2.07% |
| INTC | Intel Corporation | D | 5/18/2015 | $32.91 | $33.71 | 102.43% | 16.13 | 2.85% |
| JBL | Jabil Circuit, Inc. | S | 2/13/2015 | $64.30 | $24.66 | 38.35% | 14.77 | 1.30% |
| JNPR | Juniper Networks, Inc. | S | 1/29/2015 | $0.00 | $27.81 | N/A | 115.88 | 1.44% |
| KLAC | KLA-Tencor Corporation | E | 1/29/2015 | $129.43 | $59.98 | 46.34% | 17.69 | 3.33% |
| LLTC | Linear Technology Corporation | E | 3/30/2015 | $18.64 | $47.74 | 256.12% | 24.99 | 2.51% |
| LRCX | Lam Research Corporation | E | 3/22/2015 | $30.31 | $82.66 | 272.72% | 26.75 | 0.87% |
| MCHP | Microchip Technology Inc. | E | 1/31/2015 | $24.58 | $48.50 | 197.31% | 26.36 | 2.95% |
| MTSC | MTS Systems Corporation | E | 4/5/2015 | $87.08 | $68.13 | 78.24% | 20.34 | 1.76% |
| MU | Micron Technology, Inc. | S | 11/11/2014 | $41.81 | $28.13 | 67.28% | 25.81 | N/A |
| NTAP | NetApp Inc. | E | 2/19/2015 | $67.45 | $33.02 | 48.95% | 16.51 | 2.00% |
| NVDA | NVIDIA Corporation | E | 5/13/2015 | $21.85 | $21.84 | 99.95% | 27.65 | 1.56% |
| SNDK | SanDisk Corporation | E | 5/21/2015 | $84.27 | $69.01 | 81.89% | 21.30 | 1.74% |
| STX | Seagate Technology PLC | E | 2/27/2015 | $180.26 | $55.34 | 30.70% | 11.82 | 3.90% |
| TEL | TE Connectivity Ltd | E | 5/23/2015 | $144.45 | $70.00 | 48.46% | 18.67 | 1.66% |
| TXN | Texas Instruments Incorporated | E | 3/12/2015 | $24.23 | $55.97 | 230.99% | 26.78 | 2.43% |
| WDC | Western Digital Corp | D | 3/31/2015 | $168.83 | $94.37 | 55.90% | 15.52 | 2.12% |
| XLNX | Xilinx, Inc. | D | 5/6/2015 | $38.17 | $47.67 | 124.89% | 22.28 | 2.60% |
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| Ticker | Name with Link | Investor Type | Latest Valuation Date | MG Value | Recent Price | Price as a percent of Value | PEmg Ratio | Div. Yield |
| A | Agilent Technologies Inc. | E | 4/3/2015 | — | $42.61 | — | — | 0.94% |
| AAPL | Apple Inc. | S | 12/12/2014 | — | $132.04 | — | — | 1.58% |
| ADI | Analog Devices, Inc. | E | 3/16/2015 | — | $68.29 | — | — | #N/A |
| ALTR | Altera Corporation | E | 3/27/2015 | — | $47.86 | — | — | 1.50% |
| AMAT | Applied Materials, Inc. | E | 5/12/2015 | — | $20.34 | — | — | 1.97% |
| APH | Amphenol Corporation | E | 3/22/2015 | — | $57.65 | — | — | 0.87% |
| BRCM | Broadcom Corporation | E | 5/22/2015 | — | $57.15 | — | — | 0.98% |
| EMC | EMC Corporation | S | 9/18/2014 | — | $26.69 | — | — | 1.72% |
| EMR | Emerson Electric Co. | S | 12/18/2014 | — | $60.95 | — | — | 3.08% |
| FLIR | FLIR Systems, Inc. | E | 5/14/2015 | — | $31.07 | — | — | 1.42% |
| GLW | Corning Incorporated | E | 5/19/2015 | — | $21.13 | — | — | 2.27% |
| GRMN | Garmin Ltd. | E | 3/13/2015 | — | $45.46 | — | — | 4.22% |
| HPQ | Hewlett-Packard Company | S | 1/29/2015 | — | $33.78 | — | — | 2.07% |
| INTC | Intel Corporation | D | 5/18/2015 | — | $33.71 | — | — | 2.85% |
| JBL | Jabil Circuit, Inc. | S | 2/13/2015 | — | $24.66 | — | — | 1.30% |
| JNPR | Juniper Networks, Inc. | S | 1/29/2015 | — | $27.81 | — | — | 1.44% |
| KLAC | KLA-Tencor Corporation | E | 1/29/2015 | — | $59.98 | — | — | 3.33% |
| LLTC | Linear Technology Corporation | E | 3/30/2015 | — | $47.74 | — | — | 2.51% |
| LRCX | Lam Research Corporation | E | 3/22/2015 | — | $82.66 | — | — | 0.87% |
| MCHP | Microchip Technology Inc. | E | 1/31/2015 | — | $48.50 | — | — | 2.95% |
| MTSC | MTS Systems Corporation | E | 4/5/2015 | — | $68.13 | — | — | 1.76% |
| MU | Micron Technology, Inc. | S | 11/11/2014 | — | $28.13 | — | — | N/A |
| NTAP | NetApp Inc. | E | 2/19/2015 | — | $33.02 | — | — | 2.00% |
| NVDA | NVIDIA Corporation | E | 5/13/2015 | — | $21.84 | — | — | 1.56% |
| SNDK | SanDisk Corporation | E | 5/21/2015 | — | $69.01 | — | — | 1.74% |
| STX | Seagate Technology PLC | E | 2/27/2015 | — | $55.34 | — | — | 3.90% |
| TEL | TE Connectivity Ltd | E | 5/23/2015 | — | $70.00 | — | — | 1.66% |
| TXN | Texas Instruments Incorporated | E | 3/12/2015 | — | $55.97 | — | — | 2.43% |
| WDC | Western Digital Corp | D | 3/31/2015 | — | $94.37 | — | — | 2.12% |
| XLNX | Xilinx, Inc. | D | 5/6/2015 | — | $47.67 | — | — | 2.60% |
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Disclaimer:  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 that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
