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stockmarket This screen is of the Modern Graham valuation database’s most undervalued companies suitable for the enterprising investor.

The first step for the screen is to determine which companies pass the tests for the enterprising investor, updated from Benjamin Graham’s tests presented in The Intelligent Investor.

Specifically, here are the tests required for the enterprising investor (must pass at least 4 of the following 5 tests):

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1
  3. Earnings Stability – positive earnings per share for at least 5 years
  4. Dividend Record – currently pays a dividend
  5. Earnings growth – EPSmg greater than 5 years ago

Additionally, a company can qualify for the enterprising investor if it passes the tests for the defensive investor.

From there, the 10 companies trading at the greatest discount to their intrinsic value (as calculated using Graham’s Value = EPS x (8.5 + 2g) formula – see Methods for more information) are selected for this screen.

It is important to note that any screen should be the first step in a bottom up approach to investing and further research by an intelligent investor is necessary.

This month, the screen produced the following companies:

  • Tidewater Inc (NYSE:TDW) - Tidewater provides vessels and support services to the offshore energy industry. The company passes all of the requirements of both the defensive and enterprising investors, indicating it has a very strong financial condition and a history of stability. Though the earnings per share are likely to be lower this year than last, I estimate the normalized earnings per share to be $6.10 for the 2010 fiscal year. My system indicates a high estimate of growth based on historical performance, leading to a valuation of $235. Even at a much, much more conservative estimate of 3% growth, the valuation comes to $88, which is twice what the company is trading at today.
  • International Shipholding Corp. (NYSE:ISH) - International Shipholding Corp. is a similar business to Tidewater, but this company owns and operates vessels that are usually chartered out to the government and commercial enterprises through long-term charters. The company fails quite a few of the tests for the defensive investor, but is suitable for the enterprising investor. I estimate normalized earnings per share to be $3.50 for fiscal year 2009 and calculate a value to be $135 based on strong historical growth. At the conservative 3% growth estimate level, the valuation comes to $51. The company is currently trading around $34.
  • Baker Hughes Inc. (NYSE:BHI) - Baker Hughes is engaged in providing various services to the oilfield industry from drilling products to consulting services. The company passes all the tests for both the defensive and enterprising investors. Despite a significant drop in earnings per share from $5.30 in 2008 to $1.52 in 2009, I estimate the normalized earnings per share to be $4.00 for 2009. In addition, the normalized earnings per share have grown significantly over the last few years, a trend I expect to continue. The Modern Graham estimate of value is $154, while a conservative estimate based on 3% growth is $58. The company is currently trading around $41.
  • Garmin Limited (NASDAQ:GRMN) – Garmin has taken a bit of a hit in the market the last few weeks, presumably because of the introduction of Google’s map services. However, it seems Mr. Market is forgetting Garmin’s other segments – including aviation and marine – which continue to hold strong profit margins and market share. The company passes the tests for both the defensive and enterprising investors. Normalized earnings per share should be around $2.86 for 2009, leading to a Modern Graham valuation of $110. A conservative 3% growth estimate would lead to a valuation of $42. The company is currently trading near $30.
  • Chubb Corp. (NYSE:CB) – Chubb is a holding company for a group of insurance companies. The company passes the tests for the defensive investor, which makes it automatically suitable for the enterprising investor. The company’s earnings have taken a hit the last couple of years, but the normalized earnings per share of $5.42 are still high compared to five years ago. The estimate of value is $167 based on the higher estimate of growth, and $79 based on only 3% growth. The company currently trades around $51.
  • Olin Corp. (NYSE:OLN) – Olin is a chemical company. The company passes the tests for the enterprising investor but is unsuitable for the defensive investor based on market cap and a lack of earnings stability over a 10 year period. The earnings likely will drop to a 6 year low this year, but normalized earnings shouldn’t see as much of a decline and remain at $1.37. The valuation comes to $53 based on my estimate of growth, and $20 based on 3% growth. The company is trading at $16.50.
  • National Oilwell Varco, Inc. (NYSE:NOV) – National Oilwell Varco is another provider of products and services for the oilwell industry (see BHI, above). The company passes the tests for the enterprising investor, though it would be even stronger if it paid a dividend. Though earnings per share dropped in 2009, the normalized earnings are still higher than 2008 and come in at $3.36. Based on incredible growth over the past 5 years, the valuation estimate is $129. The 3% growth valuation is $49. The company currently trades around $44.
  • Goodrich Company (NYSE:GR) – Goodrich provides products and services to the aviation markets as well as the defense and space markets. The company is very strong and passes all of the tests for both the defensive and enterprising investors. Normalized earnings per share in 2009 should be $4.28, a significant increase from the $1.19 seen in 2003. With such strong growth, the company is valued at $165. The more conservative estimate of 3% growth brings a value of $62. The company is currently trading at around $59.
  • General Dynamics Corp. (NYSE:GD) – General Dynamics is a business very similar to Goodrich, providing products and services to aviation, defense, shipbuilding and other markets. The company passes the tests for the defensive investor, automatically qualifying it for the enterprising investor, but the current ratio could be improved. The earnings in 2009 should actually not drop very much from 2008 levels, if they drop at all. As a result, the normalized earnings per share do increase to $5.49. The Modern Graham valuation of the company comes to $186, and a conservative 3% growth estimate leads to a valuation of $80. The company currently trades at $67.50.
  • UnitedHealth Group (NYSE:UNH) – United Heatlh Group is a diversified health and well-being company. The company passes the tests for the defensive investor, though the current ratio could be improved. Earnings per share in 2009 should be higher than 2008, though remain below 2007. Normalized earnings should be $2.87, leading to a valuation of $80. At 3% growth, the valuation would be $42. The company currently trades at $29.

Disclosure: At time of publication, author was long GRMN and TDW.

Photo by Perpetualtourist2000.