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10 Companies Benjamin Graham Would Invest In Today – July 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.

Here are the ten companies Benjamin Graham would invest in today:

Aflac Inc. (AFL)

500px-Aflac.svgAflac passes the initial requirements of both the Defensive Investor and the Enterprising Investor. In fact, the company passes every requirement of both investor types, which is a rare accomplishment indicative of the company’s strong financial position. 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, it has grown its EPSmg (normalized earnings) from $3.89 in 2011 to an estimated $6.13 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of only 0.87% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 11.5% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that Aflac is significantly undervalued at the present time.  (See the full valuation)

American International Group (AIG)

220px-AIG_logo.svgAmerican International Group Inc. qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the inconsistent dividend history, as well as the lack of earnings stability or growth over the last ten years, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising 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 undervalued after growing its EPSmg (normalized earnings) from a loss of $109.06 in 2011 to an estimated gain of $5.14 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.56% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.  (See the full valuation)

Caterpillar Inc. (CAT)

500px-Caterpillar_logo.svgCaterpillar Inc. passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only initial concern is the low current ratio, and while the Enterprising Investor is concerned by the level of debt relative to the current assets, those concerns are overlooked since the company meets the more conservative Defensive Investor criteria. 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 $3.96 in 2010 to $6.45 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 2.31% annually over the next 7-10 years. In fact, the historical growth is around 12.61% 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.  (See the full valuation)

Discover Financial Services (DFS)

Discover_FinancialDiscover Financial Services passes the initial requirements of the Enterprising Investor, but not the more conservative Defensive Investor. The Defensive Investor has an issue with the company’s inconsistent dividend history. 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, it has grown its EPSmg (normalized earnings) from $2.49 in 2011 to an estimated $4.88 for 2015. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 1.75% over the next 7-10 years. The ModernGraham valuation model returns an estimate of intrinsic value falling above the current price, indicating that Discover Financial Services is undervalued at the present time.  (See the full valuation)

International Paper Co. (IP)

500px-International_Paper.svgInternational Paper Co. is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the low current ratio, lack of earnings stability over the last ten years, and the high PEmg ratio.  The Enterprising Investor is only concerned with the level of debt relative to the net current assets.  As a result, all 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 $1.49 in 2011 to an estimated $2.66 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 5.64% annual earnings growth over the next 7-10 years 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)

KLA-Tencor (KLAC)

KLA_logolockup_RGBKLA-Tencor performs 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 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 $1.70 in 2011 to an estimated $3.22 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 5.11% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 18% annually, 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 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)

Macerich Co. (MAC)

500px-Macerich.svgMacerich Company is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned by the low current ratio, and the Enterprising Investor is willing to overlook concerns regarding the level of debt relative to the current assets because the company satisfies the more conservative Defensive Investor.  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 $1.09 in 2011 to an estimated $5.06 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 3.98% annual earnings growth over the next 7-10 years 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)

PulteGroup Inc. (PHM)

logo (1)PulteGroup is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years, and the unstable dividend history, while the Enterprising Investor’s only concern is the lack of earnings stability over the last five years. As a result, all 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, it has grown its EPSmg (normalized earnings) from a loss of $3.12 in 2011 to an estimated gain of $2.11 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of only 0.61% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged considerably more than the market’s estimate annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that PulteGroup is significantly undervalued at the present time, a result which is in line with some of its peers.  (See the full valuation)

SLM Corporation (SLM)

Sallie_Mae_logo_2009SLM Corporation passes the initial requirements of the Enterprising Investor, but not the more conservative Defensive Investor. The Defensive Investor has issues with the company’s inconsistent dividend history, and the lack of earnings stability or sufficient growth over the last ten years. 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, it has grown its EPSmg (normalized earnings) from $0.48 in 2011 to an estimated $1.26 for 2015. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of an annual earnings loss of 0.14% over the next 7-10 years. The ModernGraham valuation model returns an estimate of intrinsic value falling above the current price, indicating that the company is undervalued at the present time.  (See the full valuation)

Travelers Companies (TRV)

500px-The_Travelers_Companies.svgTravelers Companies qualifies for both the Defensive Investor and the Enterprising Investor.  The company passes all of the requirements of both investor types, a rare accomplishment.  As a result, all 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 undervalued after growing its EPSmg (normalized earnings) from $5.25 in 2011 to an estimated $8.80 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 1.61% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.  (See the full valuation)

Disclaimer:  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 the Wikipedia or the individual company’s website; this article is not affiliated with the company in any manner.

 

 

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