Five Companies Worth Researching This Weekend

Looking for some companies to research this weekend? Here are five that I like. Each passes the ModernGraham tests for the Enterprising Investor, based on the teachings of Benjamin Graham. The valuation is based on a modernized version of Benjamin Graham’s IV = EPS x (8.5 + 2g) formula presented in The Intelligent Investor, with the earnings per share being normalized through a weighted average over the last five years.

• American Electric Power Co (AEP) – American Electric passes the tests for the defensive investor, which automatically qualifies the company for the enterprising investor as well. The current ratio of 0.78 could be improved, but the company has earnings stability, growth, and a strong dividend record. The dividend yield is currently 1.64% and the normalized earnings per share is $2.84, leading to a P/E of 10.84. Based on my estimate of growth, I value the company at $44. The company recently began capturing carbon emissions at one of its plants (the first to do so in the nation), and appears to be well suited to adapt to the growing “green” movement.

• Aflac Incorporated (AFL) – Aflac also qualifies for the defensive investor. The company has had very stable earnings and earnings growth. In addition, the dividend yield is 2.50%, normalized earnings per share is $3.32, and P/E is 13.00. I currently value the company at $78. Insurance companies are – traditionally – solid investments when the price is down, and the market today seems to be redefining the concept of beating down financial/insurance companies. Aflac’s latest earnings release beat expectations and I believe the company still has a way to go back up.

• Chubb Corp (CB) – Chubb Corp, like the previous two companies, is suitable for the defensive investor. The company has a strong balance sheet and very strong stability. Another insurance company that seems to be a bit undervalued, Chubb has a dividend yield of 2.74%, normalized earnings per share of $5.42, and a P/E of 9.30. I currently value the company at a whopping $167 (based on the company’s great growth over the last 10 years) – a more “conservative” estimate based on only 3% annual growth comes to $79. In fact, based on the normalized earnings per share of $5.42, the market is currently implying only a 0.49% annual growth rate over the next 7-10 years. Surely that can be beat, given Chubb’s recent history of growth.

• E.I. du Pont de Nemours & Co. (DD) – DuPont does not qualify for the defensive investor based on a low current ratio (1.61), lack of strong enough earnings growth over the last 10 years, and a high price to book ratio. However, the company does pass the tests for the enterprising investor as the current ratio is over 1.5, and earnings have grown over the last 5 years. The dividend yield is a very appealing 4.97%, the normalized earnings per share is $2.41, leading to a P/E of 13.68. I value the company at $41. One of the most compelling traits of the company is the dividend. This week they declare the fourth quarter dividend of $0.41/share – the 421st consecutive quarterly dividend. Now that is dividend record stability!

• Entergy Corp (ETR) – Entergy Corp passes the tests for the defensive investor with flying colors. The only thing holding it back from a perfect score is the current ratio of only 1.18. The company yields a dividend of 3.00%, has a normalized earnings per share of $5.72, and a P/E ratio of 13.73 based on that normalized earnings per share. I value the company at $137. I believe the company is strongly suited to perform well over the long-term based on its efforts to grow its nuclear division. Entergy currently is the second largest producer of nuclear energy in the United States and is seeking to build more nuclear plants. Like American Electric Power Co, the company appears to have a good future ahead of it with the “green” movement.

Full Disclosure: At the time of publication, the author did not hold a position in any of the mentioned companies.

Comments

[skwestorange]

Applying a ten time multiple for utility companies that have revenue growth in the 1 to 2% annually is questionable.

2009 Nov 01 10:58 AM

[Tom Armistead]

Agree with you on Chubb, very conservative valuations suggest 79 or 80 for a dividend payer trading in the 50 area.

I am playing it with LEAPS, the Jan2011 40 calls, leverage applied to this quality situation could provide good returns.

2009 Nov 01 11:01 AM

[funfun]

Pressure on DuPont's rich annual dividend of $1.64 per share will be intensifying as DuPont faces a looming BIG BLACK HOLE of vanishing Pharma earnings! The sure and certain expiration of the patents protecting DuPont Cozaar® and Hyzaar® will begin to blowtorch more than $1 billion of Pharma PTOI yearly. These two drugs are the only key assets remaining in DuPont's fading and phased-out Pharma "growth platform".

For perspective, in the first nine months of this year, 2009, Pharma accounted for circa one-third of total DuPont PTOI! DuPont's customarily secretive Management to date has said very little publicly about this BIG BLACK HOLE, but has indicated they will be more forthcoming this week on Nov. 3, 2009 at a conference for investors and analysts at the Company's World Headquarters For Sustainable Excellence in Wilmington, Delaware. Heads-up, fellow investors!

funfundvierzig...funfun..

2009 Nov 01 11:38 AM

[funfun]

Additionally on DuPont's bleak prospects, DuPont Senior Management, specifically DuPont Executive Vice President Mark Vergnano, admitted to private investors less than a month ago, Oct. 6, 2009, that DuPont would not match its noticeably weak earnings of 2008, or diluted earnings per share of $2.20, until the earliest well into the next decade, 2012! This tells me the intervening years will show sick results.

...funfun..

2009 Nov 01 12:00 PM

[rpell]

American Electric Power's dividend yield is actually 5.4%, rather than the 1.64% as stated. (Its annual dividend payment is $1.64.)

2009 Nov 01 01:07 PM

[jerrydd]

If a utility is wanted FPL is a far better choice. It's down because it's utility division is down in Fla but that will change and it is the largest wind producer in the US among other Re and nuke. It's getting 2 new nukes for free as Fla is making it's customers pay for them up front.

2009 Nov 02 09:35 AM

[mother_jones_husband]

"Well into the next decade 2012"
That's only 2 years of earning in the area of this year. The economy will take at least that long to rebound to previous years. DD still has a much better 2 year outlook that 2 of it's main rivals DOW and Monsanto.


On Nov 01 12:00 PM funfun wrote:

> Additionally on DuPont's bleak prospects, DuPont Senior Management,
> specifically DuPont Executive Vice President Mark Vergnano, admitted
> to private investors less than a month ago, Oct. 6, 2009, that DuPont
> would not match its noticeably weak earnings of 2008, or diluted
> earnings per share of $2.20, until the earliest well into the next
> decade, 2012! This tells me the intervening years will show sick
> results.
>
> ...funfun..

2009 Nov 02 09:37 AM

[jarco]

Florida's upfront power plant financing is coming under fire and likely will fade or be drastically realigned with other states utility regulators.

FPL went after wind and other alternatives because it's boxed in territorially. Geographically surrounded by oceans water and PGN to the north, its unable to merge/expand to obtain synergy efficiencies unlike almost all other utilities over the past decade plus. Since alternatives are so heavily dependent upon favorable tax treatments, long term profitability/viability must be questioned.


On Nov 02 09:35 AM jerrydd wrote:

>
> If a utility is wanted FPL is a far better choice. It's down because
> it's utility division is down in Fla but that will change and it
> is the largest wind producer in the US among other Re and nuke. It's
> getting 2 new nukes for free as Fla is making it's customers pay
> for them up front.

2009 Nov 02 10:37 AM