5 Hints for Navigating Mr. Market’s Movements – Throwback Thursday

This was originally published in April 2009, titled “5 Things to Remember as the Market Turns the Corner.”  It has some helpful hints that are true in any market environment.  This week for Throwback Thursday we will revisit those hints.

1.  Prices may fluctuate as Mr. Market sways his opinion, but values only change with earnings results.

Investing Research

A value of a company should be based on the earnings that it has achieved, and the present value of future earnings.  We use the past 10 years of earnings to determine an anticipated growth rate for a company, then use a normalized earnings per share amount to calculate the present value of that earnings per share grown in a perpetuity discounted at 11.78%.  This is the basis of Benjamin Graham’s formula from The Intelligent Investor, and you can easily calculate it yourself with the use of our valuation calculator.

2.  Diversification is your friend.

We don’t always buy into the whole modern portfolio theory idea that the market is efficient (at best it is semi-strong efficient), but the fact remains that by diversifying across a number of investments and industries you can lower your risk. In football you don’t want to have to gain all 10 yards in one play. You want to gain 4 yards per play on average because then you will easily get more than the 10 yards you need every 4 plays. The same idea comes into play with diversification. You don’t want to have the risk that your single chance at gaining will come from one company. You could fail with that investment and end up with nothing. We favor diversification across a small field of 10-15 companies for the enterprising investor or the use of ETFs for a very passive defensive investor.

3.  Rebalance your equity/bond ratio.

BalanceLast fall as the market was coming down we had a number of people tell us they were taking money out of their equities and putting them in bonds. I cringed every time I heard it. They should have been doing the opposite – take money out of your bonds now and put them in equities! Sure, this downturn hasn’t behaved exactly the way that it should (bonds rise as stocks fall) but equities will rise more when the market recovers. For an easy way to keep balance between bonds and equities in your portfolio, rebalance every 6-18 months (depending on your own preferences regarding capital gains taxation), and strive for a set ratio of 110-your age=% of portfolio in equities. For example, a 30 year old should have 80% of his portfolio in equities while a 60 year old should have a 50/50 split.  In The Intelligent Investor, Benjamin Graham suggests a 50/50 split, with flexibility of moving to a 25/75 split (in either direction) depending on the individual’s expectations of the market.

4.  Rebalance your individual investments.

When you rebalance your equity/bond ratio, do it with your individual investments. If you want to diversify across 10 investments, each one should constitute 10% of your overall portfolio. Over time, some investments will rise faster than others leading to them taking up more than their share of your portfolio. By rebalancing them back down to 10% you lock in some gains and are able to put those funds towards the investments that have taken longer to rise (and may be due for a quicker rise).

5.  Dividends can make or break a portfolio.

BuffettFor both the defensive and enterprising investors, we think that dividends are an extremely important part of the investment screen. One reason is that companies that make dividend payments tend to be more established and stable businesses. Another reason is that a constant dividend stream lowers the risk of capital depreciation. As Warren Buffett says, “The number one rule in investing is to not lose money.” If you invest in a company that has a dividend yield of 3%, you can face losing some capital in the price of the company over time without actually losing any money.

Looking Back at the DJIA in July 2008 – Throwback Thursday

image (11)

 

In July 2008, I analyzed the Dow Jones Industrial Average (“DJIA”) to determine its overall valuation, and published the results here.  Overall, the DJIA was valued at 14,872.  On that day it closed at 11,397.56, which was about 75% of its value and right on the borderline of the ModernGraham margin of safety but leaning towards undervalued.  Since then, it has risen to 16,424.85, a rise of 44%.  But as I was looking through the archives to select a topic for this Throwback Thursday, I wondered how did the components that were rated well by the ModernGraham valuation model end up working out?  Did they beat the DJIA?  That’s what we’ll look at today.

The Table from 2008

The original post looked at only the components which qualified for either the Defensive Investor or the Enterprising Investor.  The following table summarizes the valuations and prices at the time of each component:

Ticker Name Value Price %Value
MMM 3M $107 $69.77 65.4%
AA Alcoa $59 $32.89 55.64%
T AT&T $34 $30.68 90.85%
BAC Bank of America $36 $28.16 77.96%
AIG American International Group $71 $23.24 32.56%
BA Boeing Corp $86 $62.64 72.81%
CVX Chevron Corp $216 $82.62 38.24%
C Citigroup $18 $16.95 94.38%
KO Coca-Cola $43 $51.21 118.93%
XOM Exxon-Mobil $162 $80.83 49.80%
GE General Electric $30 $27.78 91.62%
HPQ Hewlett-Packard $54 $43.22 80.48%
HD Home Depot $47 $23.30 50.03%
INTC Intel Corp $21 $21.64 100.98%
JNJ Johnson & Johnson $69 $68.55 98.83%
MSFT Microsoft $35 $25.52 72.40%
PFE Pfizer $19 $18.42 96.74%
PG Proctor & Gamble $57 $63.95 113.19%
VZ Verizon $27 $33.79 125.33%
WMT Walmart $58 $56.40 97.85%
DIS Walt Disney $46 $30.60 66.21%

The following companies were components at that time but are not included in the table, indicating they were deemed to be Speculative by the ModernGraham approach at the time:

  • American Express (AXP)
  • Caterpillar Inc. (CAT)
  • E. I. du Pont de Nemours and Co. (DD)
  • General Motors (GM)
  • International Business Machines (IBM)
  • JP Morgan Chase (JPM)
  • McDonald’s (MCD)
  • Merck & Co. (MRK)
  • United Technologies (UTX)

The Undervalued Companies

Next, we will take a look at the companies deemed undervalued at the time and see how they have done since then.  Overall, $10,000 invested in these 9 components would be worth $16,277.45, a gain of 62.77%.  Clearly, that result would have been even better had AIG not been included.

Ticker Name Value Price Then %Value Price Now Change
MMM 3M $107 $69.77 65.40% 136.77 96.03%
AA Alcoa $59 $32.89 55.64% 13.42 -59.20%
AIG American International Group $71 $464.80* 32.56% 50.39 -89.16%
BA Boeing Corp $86 $62.64 72.81% 126.04 101.21%
CVX Chevron Corp $216 $82.62 38.24% 121.83 47.46%
XOM Exxon-Mobil $162 $80.83 49.80% 99.94 23.64%
HD Home Depot $47 $23.30 50.03% 76.58 228.67%
MSFT Microsoft $35 $25.52 72.40% 40.4 58.31%
DIS Walt Disney $46 $30.60 66.21% 78.95 158.01%

*Adjusted for splits.

The Overvalued or Fairly Valued Companies

Now, take a look at the companies that were rated as overvalued or fairly valued at the time.  Overall, $10,000 invested in these 12 components would be worth only $11,390.84 today, which is a gain of 13.91%.

Ticker Name Value Price %Value Price Now Change
T AT&T $34 $30.68 90.85% 36.1 17.67%
BAC Bank of America $36 $28.16 77.96% 16.13 -42.72%
C Citigroup $18 $169.50* 94.38% 48.18 -71.58%
KO Coca-Cola $43 $25.61* 118.93% 40.59 58.49%
GE General Electric $30 $27.78 91.62% 26.12 -5.98%
HPQ Hewlett-Packard $54 $43.22 80.48% 32.49 -24.83%
INTC Intel Corp $21 $21.64 100.98% 26.93 24.45%
JNJ Johnson & Johnson $69 $68.55 98.83% 98.75 44.06%
PFE Pfizer $19 $18.42 96.74% 30.09 63.36%
PG Proctor & Gamble $57 $63.95 113.19% 81.65 27.68%
VZ Verizon $27 $33.79 125.33% 47.1 39.39%
WMT Walmart $58 $56.40 97.85% 77.22 36.91%

*Adjusted for splits.

The Speculative Companies

Taking a look at the companies deemed to be unsuitable for either the Defensive Investor or the Enterprising Investor, we see that one of them declared bankruptcy, General Motors, and $10,000 invested in these 9 components would have been worth $14,950.44, a gain of 49.50%.

Ticker Name Price Then Price Now Change
AXP American Express Company 37.52 87.4 132.94%
CAT Caterpillar Inc. 70.99 102.93 44.99%
DD E I Du Pont De Nemours And Co 43.56 67.72 55.46%
GM General Motors Company Declared Bankruptcy == 0 value -100.00%
IBM International Business Machines Corp. 127.66 196.4 53.85%
JPM JPMorgan Chase & Co. 40.75 55.26 35.61%
MCD McDonald’s Corporation 59.7 100.83 68.89%
MRK Merck & Co., Inc. 32.41 56.26 73.59%
UTX United Technologies Corporation 65.52 118.07 80.20%

Conclusion

Approach Gain
DJIA as a whole 44%
Undervalued 63%
Overvalued or Fairly Valued 14%
Speculative 50%

The companies rated as Undervalued and suitable for either the Defensive Investor or the Enterprising Investor significantly outperformed the alternatives.

Going Forward – How to Use this Information

One way to use this information going forward would be to follow along with the ModernGraham valuations through signing up for the free daily email list (and receive a free copy of the March 2014 issue of MG Stocks & Screens when you do), or by becoming a premium member and utilizing the MG Stocks & Screens monthly report.  Stocks & Screens lists all of the companies valued by ModernGraham and screens them to find the companies that are suitable for Defensive Investors or Enterprising Investors and undervalued.

Disclosure:  The author held a long position in DIS, and HD but no other companies at the time of publication and had no intention of changing that position in the next 72 hours.

Throwback Thursday: 3M (MMM) in 2008

image (11)

In 2007-08, I revised the ModernGraham valuation model to follow more closely Benjamin Graham’s methods.  Details about the change can be found in this post.  One of the first valuations I wrote utilizing the updated model was on 3M (see the original valuation here).  In summary of that 2008 valuation of 3M, the ModernGraham approach determined the company was not suitable for the Defensive Investor but was suitable for the Enterprising Investor.  In addition, the ModernGraham valuation model returned an estimate of intrinsic value around $170, while the price at the time was $77.  This week as part of Throwback Thursday, we will look at how 3M has done since that 2008 valuation.

Performance vs. the Market

As the following chart demonstrates, 3M has significantly outperformed both the Dow Jones Industrial Average (DJIA) and the S&P 500.
MMM Chart

MMM data by YCharts

Earnings History

Earnings Per Share

2013 (estimate) $6.68
2012 $6.32
2011 $5.96
2010 $5.63
2009 $4.52
2008 $4.89

Earnings Per Share – ModernGraham

2013 (estimate) $6.16
2012 $5.75
2011 $5.42
2010 $5.14
2009 $4.88
2008 $4.94

The company’s earnings have continued to rise during the period since the valuation.

Dividends

MMM Dividend Chart

MMM Dividend data by YCharts

A total of $13.60 per share has been paid in dividends since the valuation, which is a total yield of 17.7% on the price at time of valuation.  The latest dividend was $0.855, which if that is repeated every quarter would be an annual yield of 4.4% on the original price at time of valuation.

Conclusion

The rating of 3M as undervalued back in May of 2008 has turned out very well, as an investment of $1,000 in the company back then would now be worth $1,729.30.  When you take into account the dividends (assuming the $1,000 investment and $77 price at the time, the investor would have received approximately 13 shares) that total $176.80 from the investment, the total return on the initial investment would be $1,906.10, or a gain of over 90%.  It’s important to note that the gain would have been even higher if the investor reinvested his dividends, which would amplify the return on the initial investment due to the compounding nature of dividends.  That’s not bad, considering the market as a whole only rose 25-30% during the time frame.

Going Forward – 3M Today

The latest ModernGraham valuation of 3M was completed on January 21, 2014 (it will be due for another quarterly valuation in a few weeks).  In summary, we found the company to be suitable for the Enterprising Investor but not the Defensive Investor and overvalued.  The market was implying an estimate of 6.90% earnings growth, which is higher than the historical growth indicates.  Based on the historical growth, the ModernGraham valuation model returned an estimate of intrinsic value that was around $100.  Compared to the $170 estimate from 2008, one can see that the value of the company has fallen over time, likely due to a slow-down in the growth shown.

Throwback Thursday: A Look Back on the Bargain Basement Portfolio

image (11)Back in 2009 at the depths of the bear market, we created the Bargain Basement Portfolio, a mock portfolio that sought to invest in companies trading below their Net Working Capital.  Net working capital is calculated as current assets minus current liabilities, divided by the outstanding shares.  To find the companies, we utilized Value Line’s Bargain Basement screen.  To review, here are some of the rules of the portfolio:

  1. Using the Value Line Bargain Basement Screen, select companies that are priced at 75% or lower of Price-to-”Net” Working Capital and have achieved a positive EPS for at least 5 straight years.
  2. Buy shares when the price is 75% or lower, and hold until the price is 150% or higher of “Net” Working Capital.
  3. Maximum number of companies invested at a given time is 5 (target allocation of 20% of portfolio).  If there are more than 5 suitable companies, any purchases will be made in the company with the lowest Price-to-”Net” Working Capital ratio.
  4. Any funds not invested in suitable companies will be invested in the iShares Barclays 10-20 yr Treasury ETF, ticker symbol TLH.
  5. Any dividends received are placed in cash to be reinvested during rebalancing.
  6. Portfolio is rebalanced to target allocations every 3 months.

Unfortunately, this portfolio become a casualty of my other time commitments when I attended law school, so we cannot be sure exactly how it would have worked out.  However, we can look to see how the companies did in the time since the last post on the portfolio from October 2009.  At that time, the company was invested about 20% in both Movado Group (MOV) and PC Connection (PCCC) with the remaining 60% in the treasury bond fund.  Without keeping up with rebalancing, investing in new companies that have become suitable for the portfolio, or accounting for dividends, the portfolio is currently worth over $350,000.  Since we started with $100,000, that is about a 250% gain on the investment.  For comparison, the Dow Jones Industrial Average has gone from 7,776 to 16,573, a gain of 113% and the S&P 500 has gone from 816 to 1891, a gain of 132%.

Portfolio Today

Name Ticker Shares Cost Basis Current Price Market Value Pct of Portfolio Gain/Loss
iShares 10-20 Yr Treasury ETF TLH 930 $104,147.04 $124.86 $116,119.80 32.80% 11.50%
Movado Group, Inc. MOV 2423 $18,287.30 $45.70 $110,731.10 31.27% 505.51%
PC Connection PCCC 6032 $27,259.65 $21.09 $127,214.88 35.93% 366.68%
Cash 2.91 0.00%
Total $354,068.69 254.07%

Treasury Fund’s Performance Since 10/2009

TLH Chart

TLH data by YCharts

Movado Group’s Performance Since 10/2009

MOV Chart

MOV data by YCharts

PC Connection’s Performance Since 10/2009

PCCC Chart

PCCC data by YCharts

Going Forward

I’ve checked the Value Line Bargain Basement Screen a few times in the last couple of months, and at this time there are not any companies that are trading anywhere near qualifying for this portfolio.  In addition, since Net Current Asset Value (NCAV) is more synonymous with Benjamin Graham, I intend to one day have a new mock portfolio based on Companies Trading Close to NCAV, which is one of the screens in ModernGraham Stocks & Screens.  At this point, none of the 217 companies in the ModernGraham database are trading below NCAV (the closest is National Presto Industries, which is trading around 275% of NCAV), but the mock portfolio will be created as soon as there are companies in the database that qualify.

ModernGraham Valuation: Bank of America Corp (BAC)

moneyCompany Profile (obtained from Google Finance): Bank of America Corporation (Bank of America) is a bank holding company, and a financial holding company. Bank of America is a financial institution, serving individual consumers, small and middle market businesses, corporations and Governments with a range of banking, investing, asset management and other financial and risk management products and services. Through its banking and various nonbanking subsidiaries throughout the United States and in international markets, the Company provides a range of banking and nonbanking financial services and products through five business segments: Consumer & Business Banking (CBB), Consumer Real Estate Services (CRES), Global Banking, Global Markets and Global Wealth & Investment Management (GWIM), with the remaining operations recorded in all Other. In October 2013, Bank of America Corporation announced the completion of the merger of its Merrill Lynch & Co., Inc. subsidiary into Bank of America Corporation.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass all 6 of the following tests: Score = 3/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  5. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 1/3

  1. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Opinion Overvalued
Value Based on 3% Growth $4.01
Value Based on 0% Growth $2.35
Market Implied Growth Rate 25.86%
PEmg 60.22
PB Ratio 0.77

Balance Sheet – 9/30/2013 

Total Debt $255,331,000,000
Total Assets $2,126,653,000,000
Intangible Assets $75,734,000,000
Total Liabilities $1,894,371,000,000
Outstanding Shares 10,683,280,000

Earnings Per Share

2013 (estimate) $0.83
2012 $0.25
2011 $0.01
2010 -$0.37
2009 -$0.29
2008 $0.55
2007 $3.30
2006 $4.59
2005 $4.04
2004 $3.69
2003 $3.58

Earnings Per Share – ModernGraham 

2013 (estimate) $0.28
2012 $0.01
2011 $0.14
2010 $0.66
2009 $1.59
2008 $2.77

Conclusion:

Bank of America Corp is not suitable for either the Defensive Investor or the Enterprising Investor.  The company has not had stable earnings over the last five years, has not adequately grown its earnings over the last five or ten years, and is currently trading at a high PEmg ratio.  As a result, Defensive Investors and Enterprising Investors may wish to seek other opportunities, perhaps beginning with a review of ModernGraham’s valuation of JP Morgan Chase.  From a valuation perspective, the company’s drop in EPSmg (normalized earnings) from $2.77 in 2008 to an estimated $0.28 for 2013 results in a very poor intrinsic value from the ModernGraham valuation model.  The market is currently implying a growth rate of 25.86%, well above what has been seen historically (especially considering the company has seen a drop in earnings).  It would appear that Bank of America is overvalued at the current time, and value investors seeking to follow Benjamin Graham’s methods may wish to wait until the company has a better recent history.

What do you think?  Do you agree that Bank of America Corp is overvalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Bank of America Corp (BAC) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

Feedback Wanted: ModernGraham Stocks & Screens

MG Stocks and ScreensAs you may or may not know, we recently developed a monthly eBook titled ModernGraham Stocks & Screens.  The first issue was introduced a couple of weeks ago, and you can still get a copy through the listing on Smashwords if you don’t have one yet!

At this time, as we prepare to create the next edition to be released on Christmas Day, it would be very helpful to have some feedback.  So, if you have a couple of minutes, please complete this survey regardless of whether you have purchased the product.

If you take the survey, be sure to provide your email address in the last question, and you will receive a 25% off coupon code after the next edition is released.

Inside ModernGraham Stocks & Screens, you will find screens for:

  • Undervalued Companies
  • Fairly Valued Companies
  • Overvalued Companies
  • Defensive Investor Companies
  • Enterprising Investor Companies
  • Speculative Companies
  • Lowest PEmg Ratio – Defensive Investor
  • Lowest PEmg Ratio – Enterprising Investor
  • NCAV

In addition, you can review ModernGraham’s valuation of the Dow Jones Industrial Average as a whole and its individual components!

In case you missed it, here’s the survey link again:  https://www.surveymonkey.com/s/VPK5L2S

Thanks for your help in improving ModernGraham, and thank you for your continued readership!

A Look Back on 2009 for Modern Graham

2009 was a record year for Modern Graham. With over 40,000 visits from over 28,000 unique visitors, more people visited the site than any year before. Now that the year is over, it is time to look back on what worked, what didn’t work, and lessons learned.

What Worked

  • Valuation Database – In March, I created the valuation database as a way to easily navigate through the companies I track on the site. Overall, it seems to have been very helpful to readers. It has provided inspiration to continue adding companies to the site along with requiring me to continue to keep the site updated.
  • Portfolios – In the fall I introduced a number of portfolios based on screens of the database. The posts of the screens consistently brought more traffic than any other type of posts .
  • Festival of Stocks – Over the last several months I have hosted the Festival of Stocks on a fairly regular basis. The festival is a blog carnival held on Mondays that features a number of excellent finance related posts from a variety of blogs.
  • Seeking Alpha – I also began a relationship with Seeking Alpha this year which has been very helpful to the growth of the readership base of this site.

What Didn’t Work

  • Modern Graham’s Friday Linkfest – At one point I attempted to create a weekly feature sharing articles I found interesting during the week. I also sought to have readers submit articles they found interesting. Unfortunately, the few submissions I received did not follow the rules I set up for the feature and overall it seemed to take more work than the value it provided.
  • Modern Graham Academy – This is a part of the site I hope to revive in 2010 (tomorrow I’ll outline some goals for the year) but the fact remains it was an unsuccessful venture in 2009.

Biggest Lesson Learned

  • Importance of dividends – I’ve always understood that dividends are a critical part of an investment strategy, but this year I feel like that fact has become ever more evident. My old view was that dividend payments are a great indicator of a company’s financial strength (which they are) but now it is clear they also can be used to boost investment returns, stablize downside risk or simply provide income. My knowledge base related to dividends increased significantly from following posts at Dividends Value, The Dividend Guy, and Dividend Growth Investor.

JPMorgan Chase & Co Valuation – April 2019 #JPM

Company Profile (excerpt from Reuters): JPMorgan Chase & Co. (JPMorgan Chase), incorporated on October 28, 1968, is a financial holding company. The Company is engaged in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing and asset management. JPMorgan Chase’s activities are organized into four business segments, as well as a Corporate segment. The Company’s segments include Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management. Its principal bank subsidiaries include JPMorgan Chase Bank, National Association (JPMorgan Chase Bank, N.A.), a national banking association, and Chase Bank USA, National Association (Chase Bank USA, N.A.), a national banking association that is the Company’s credit card-issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities LLC (JPMorgan Securities), the United States investment banking firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally, as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. The Company’s principal operating subsidiary in the United Kingdom is J.P. Morgan Securities plc, a subsidiary of JPMorgan Chase Bank, N.A.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of JPM – April 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $345,203,229,629 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 75.51% Pass
5. Moderate PEmg Ratio PEmg < 20 13.57 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.38 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $7.76
MG Growth Estimate 7.10%
MG Value $176.18
Opinion Undervalued
MG Grade A
MG Value based on 3% Growth $112.58
MG Value based on 0% Growth $65.99
Market Implied Growth Rate 2.54%
Current Price $105.37
% of Intrinsic Value 59.81%

JPMorgan Chase & Co. qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position . The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $5.27 in 2015 to an estimated $7.76 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.54% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into JPMorgan Chase & Co. revealed the company was trading below its Graham Number of $116.88. The company pays a dividend of $2.72 per share, for a yield of 2.6%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 13.57, which was below the industry average of 15.47, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

JPMorgan Chase & Co. fares extremely well in the ModernGraham grading system, scoring an A.

Stage 3: Information for Further Research

Graham Number $116.88
PEmg 13.57
PB Ratio 1.38
Dividend Yield 2.58%
TTM Dividend $2.72
Number of Consecutive Years of Dividend Growth 8

 

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Long-Term Debt & Capital Lease Obligation $282,031,000,000
Total Assets $2,622,532,000,000
Intangible Assets $54,349,000,000
Total Liabilities $2,366,017,000,000
Shares Outstanding (Diluted Average) 3,347,400,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $8.63
Dec2018 $9.00
Dec2017 $6.31
Dec2016 $6.19
Dec2015 $6.00
Dec2014 $5.29
Dec2013 $4.34
Dec2012 $5.20
Dec2011 $4.48
Dec2010 $3.96
Dec2009 $2.26
Dec2008 $1.35
Dec2007 $4.38
Dec2006 $4.04
Dec2005 $2.38
Dec2004 $1.55
Dec2003 $3.24
Dec2002 $0.80
Dec2001 $0.80
Dec2000 $2.86
Dec1999 $3.69

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $7.76
Dec2018 $7.07
Dec2017 $5.95
Dec2016 $5.65
Dec2015 $5.27
Dec2014 $4.82
Dec2013 $4.41
Dec2012 $4.11
Dec2011 $3.47
Dec2010 $3.05
Dec2009 $2.69
Dec2008 $2.85
Dec2007 $3.44
Dec2006 $2.78
Dec2005 $2.01
Dec2004 $1.84
Dec2003 $2.08

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Wells Fargo & Co Valuation – April 2019 #WFC
SunTrust Banks Inc Valuation – March 2019 #STI
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US Bancorp Valuation – March 2019 #USB
Citizens Financial Group Inc Valuation – February 2019 $CFG
BB&T Corp Valuation – February 2019 $BBT
M&T Bank Corp Valuation – February 2019 $MTB
Bank of America Corp Valuation – January 2019 $BAC
Fifth Third Bancorp Valuation – January 2019 $FITB

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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Wells Fargo & Co Valuation – April 2019 #WFC

Company Profile (excerpt from Reuters): Wells Fargo & Company, incorporated on January 24, 1929, is a bank holding company. The Company is a diversified financial services company. The Company has three operating segments: Community Banking, Wholesale Banking, and Wealth and Investment Management. The Company provides retail, commercial and corporate banking services through banking locations and offices, the Internet and other distribution channels to individuals, businesses and institutions in all 50 states, the District of Columbia and in other countries. The Company provides other financial services through its subsidiaries engaged in various businesses, principally: wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency and brokerage services, computer and data processing services, trust services, investment advisory services, mortgage-backed securities servicing and venture capital investment. The Company has its administrative facilities at various locations, including Phoenix, Arizona; San Francisco, California; San Jose, California; Greenwood Village, Colorado; Littleton, Colorado; Rochester, Minnesota; St. Louis, Missouri; Las Vegas, Nevada; Portland, Oregon, and Austin, Texas. The Company offers approximately 13,000 automated teller machines (ATMs) and over 6,000 retail banking stores coast to coast.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of WFC – April 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $220,466,305,698 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 55.90% Pass
5. Moderate PEmg Ratio PEmg < 20 11.21 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.16 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $4.33
MG Growth Estimate 1.75%
MG Value $52.06
Opinion Fairly Valued
MG Grade A-
MG Value based on 3% Growth $62.85
MG Value based on 0% Growth $36.84
Market Implied Growth Rate 1.36%
Current Price $48.61
% of Intrinsic Value 93.38%

Wells Fargo & Co qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position . The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $3.88 in 2015 to an estimated $4.33 for 2019. This level of demonstrated earnings growth supports the market’s implied estimate of 1.36% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into Wells Fargo & Co revealed the company was trading below its Graham Number of $63.18. The company pays a dividend of $1.64 per share, for a yield of 3.4%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 11.21, which was below the industry average of 15.47, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Wells Fargo & Co fares extremely well in the ModernGraham grading system, scoring an A-.

Stage 3: Information for Further Research

Graham Number $63.18
PEmg 11.21
PB Ratio 1.16
Dividend Yield 3.37%
TTM Dividend $1.64
Number of Consecutive Years of Dividend Growth 8

Useful Links:

ModernGraham tagged articles Morningstar
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Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Long-Term Debt & Capital Lease Obligation $229,044,000,000
Total Assets $1,895,883,000,000
Intangible Assets $43,055,000,000
Total Liabilities $1,698,817,000,000
Shares Outstanding (Diluted Average) 4,698,600,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $4.70
Dec2018 $4.28
Dec2017 $4.10
Dec2016 $3.99
Dec2015 $4.12
Dec2014 $4.10
Dec2013 $3.89
Dec2012 $3.36
Dec2011 $2.82
Dec2010 $2.21
Dec2009 $1.75
Dec2008 $0.70
Dec2007 $2.38
Dec2006 $2.47
Dec2005 $2.25
Dec2004 $2.05
Dec2003 $1.83
Dec2002 $1.58
Dec2001 $0.99
Dec2000 $1.16
Dec1999 $1.15

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $4.33
Dec2018 $4.14
Dec2017 $4.06
Dec2016 $3.99
Dec2015 $3.88
Dec2014 $3.60
Dec2013 $3.17
Dec2012 $2.59
Dec2011 $2.13
Dec2010 $1.83
Dec2009 $1.73
Dec2008 $1.80
Dec2007 $2.30
Dec2006 $2.18
Dec2005 $1.94
Dec2004 $1.69
Dec2003 $1.46

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Wells Fargo & Co Valuation – June 2018 $WFC
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Wells Fargo & Co Valuation – August 2017 $WFC
10 Undervalued Companies for the Defensive Dividend Stock Investor – January 2017
10 Undervalued Companies for the Defensive Dividend Stock Investor – December 2016

Other ModernGraham posts about related companies

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BB&T Corp Valuation – February 2019 $BBT
M&T Bank Corp Valuation – February 2019 $MTB
Bank of America Corp Valuation – January 2019 $BAC
Fifth Third Bancorp Valuation – January 2019 $FITB
Zions Bancorp Valuation – January 2019 $ZION
Regions Financial Corp Valuation – January 2019 $RF

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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

CenturyLink Inc Valuation – April 2019 #CTL

Company Profile (excerpt from Reuters): CenturyLink, Inc., incorporated on May 7, 1968, is an integrated communications company. The Company is engaged in providing an array of communications services to its residential and business customers. The Company’s segments include Enterprise and Consumer . Its communications services include local and long-distance voice, broadband, Multi-Protocol Label Switching (MPLS), private line (including special access), Ethernet, colocation, hosting (including cloud hosting and managed hosting), data integration, video, network, public access, Voice over Internet Protocol (VoIP), information technology and other ancillary services.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of CTL – April 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $13,378,511,740 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.69 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -70.46% Fail
6. Moderate PEmg Ratio PEmg < 20 20.27 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 0.67 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.69 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -20.69 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $0.61
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $8.85
MG Value based on 0% Growth $5.19
Market Implied Growth Rate 5.88%
Current Price $12.37
% of Intrinsic Value N/A

Centurylink Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.05 in 2015 to an estimated $0.61 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.88% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Centurylink Inc revealed the company was trading below its Graham Number of $20.62. The company pays a dividend of $2.16 per share, for a yield of 17.5%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 20.26, which was below the industry average of 97.99, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-43.67.

Centurylink Inc receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$43.67
Graham Number $20.62
PEmg 20.26
Current Ratio 0.69
PB Ratio 0.67
Current Dividend $2.16
Dividend Yield 17.46%
Number of Consecutive Years of Dividend Growth 0

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $3,820,000,000
Total Current Liabilities $5,531,000,000
Long-Term Debt $35,409,000,000
Total Assets $70,256,000,000
Intangible Assets $38,810,000,000
Total Liabilities $50,428,000,000
Shares Outstanding (Diluted Average) 1,067,234,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.03
Dec2018 -$1.63
Dec2017 $2.21
Dec2016 $1.16
Dec2015 $1.58
Dec2014 $1.36
Dec2013 -$0.40
Dec2012 $1.25
Dec2011 $1.07
Dec2010 $3.13
Dec2009 $3.23
Dec2008 $3.52
Dec2007 $3.72
Dec2006 $3.07
Dec2005 $2.49
Dec2004 $2.41
Dec2003 $2.35
Dec2002 $5.61
Dec2001 $1.05
Dec2000 $0.90
Dec1999 $1.70

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.61
Dec2018 $0.58
Dec2017 $1.52
Dec2016 $1.11
Dec2015 $1.05
Dec2014 $0.95
Dec2013 $1.05
Dec2012 $1.99
Dec2011 $2.55
Dec2010 $3.31
Dec2009 $3.33
Dec2008 $3.27
Dec2007 $3.03
Dec2006 $2.86
Dec2005 $2.76
Dec2004 $2.75
Dec2003 $2.72

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CenturyLink Inc Valuation – June 2018 $CTL
CenturyLink Inc Valuation – July 2017 $CTL
CenturyLink Inc Valuation – February 2016 $CTL
27 Companies in the Spotlight This Week – 12/20/14
CenturyLink Inc. Annual Valuation – 2014 $CTL

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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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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