Investors are constantly looking for a way to value companies. One such method is an intrinsic value formula proposed by Benjamin Graham commonly known as the Benjamin Graham Formula. The formula was discussed in Graham's book The Intelligent Investor and described in the 1962 edition of Security Analysis as a way for investors to quickly determine the a fair range of values for their stocks.
The formula as describe is EPS*(8.5+2g), with EPS being the trailing twelve month earnings per share and g being a reasonably expected growth rate. For this article we will assume a long-term growth rate of 4%, roughly twice the long-term growth of the U.S. economy. 8.5 represents the base P/E ratio for a no-growth company.
Below are five companies that are currently undervalued as represented by the Benjamin Graham formula. The calculation should never be used as the sole criteria to purchase a stock, but rather a starting point for further due diligence.
Seagate Technology Public Limited Company (STX) is the leading provider of hard drives and storage solutions. STX offers the industry's broadest portfolios hard drives, sold-state drives and solid-state hybrid drives. In addition, the company offers an extensive line of retail storage products for consumers and small businesses, along with data-recovery services for any brand of hard drive and digit media type. The company currently has a market cap of $11.5 billion, an enterprise to EBITDA value of 2.9 and TTM EPS of $7.70. Given the company's earnings per share and the assumed 4% growth rate, STX's fair value is calculated at $66.06 representing a potential upside of approximately 105% from its closing price on Thursday, February 28, of $32.16.
Apollo Group, Inc. (APOL) is a private education provider. The company offers educational programs and services both online and on-campus at the undergraduate, master's and doctoral levels through its wholly owned subsidiaries, The University of Phoenix, Inc. ; Institute for Professional Development ; The College for Financial Planning Institutes Corporation , and Meritus University, Inc. Apollo Group also formed a joint venture with The Carlyle Group, called Apollo Global, Inc., to pursue investments primarily in the international education services industry. APOL has a market cap of $1.9 billion, an enterprise to EBITDA value of 1.5 and TTM EPS of $3.47. APOL closed Thursday, February 28, at $16.87, over 76% below its calculated fair value of $29.77.
Western Digital Corporation (WDC) is a provider of solutions for the collection, storage, management, protection and use of digital content, including audio and video. Its principal products are hard drives, which are devices that use one or more rotating magnetic disks (magnetic media) to store and allow access to data. Its hard drives are used in desktop and notebook computers, corporate and cloud computing data centers, home entertainment equipment and stand-alone consumer storage devices. In addition to hard drives, its other products include solid-state drives and home entertainment and networking products. The company has TTM EPS of $8.30 with an enterprise to EBITDA value of 2.54 and a market cap of $11.4 billion. WDC's fair value is calculated at $71.21 a 51% premium to its previous closing price of $47.16.
Pitney Bowes Inc. (PBI) is a global provider of software, hardware and services to enable both physical and digital communications and to integrate those physical and digital communications channels. The company offers a range of equipment, supplies, software, services and solutions for managing and integrating physical and digital communication channels. It conducts its business activities in seven reporting segments within two business groups: Small & Medium Business Solutions and Enterprise Business Solutions. It maintains field service organizations to provide servicing for customers' equipment, usually in the form of annual maintenance contracts. It establishes credit approval limits and procedures of the customer and the type of product or service provided to control risk in extending credit to customers. In addition, it utilizes an automatic approval program for certain leases. The intrinsic value of PBI is $18.96 given its TTM EPS of $2.21 and the assumed 4% growth rate. With a market cap of $2.63 billion as of its last closing price of $13.10, the stock is potentially discounted by nearly 45% at its current level.
Lincoln National Corporation (LNC) is a holding company, which operates multiple insurance and retirement businesses through subsidiary companies. Through the company's business segments, it sells a range of wealth protection, accumulation and retirement income products and solutions. These products include fixed and indexed annuities, variable annuities, universal life insurance, variable universal life insurance, linked-benefit UL, term life insurance, employer-sponsored retirement plans and services, and group life, disability and dental. The stock is cheap based on its enterprise to EBITDA value of 3.72 and price-to-book ratio of 0.54. LNC has TTM EPS of $4.56 valuing the stock at $39.12, 32% above its closing price on February 27, of $29.54.