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Earnings season is here, and you're probably looking for stocks to your your watch list.

With that in mind, we wanted to use Benjamin Graham's valuation equation to identify undervalued companies that have a track record of beating analyst earnings expectations.

The math behind the valuation equation is relatively straightforward. It is based on the belief that the price-to-earnings (P/EPS) ratio should be no more than 15, and the price-to-book value (P/BVPS) ratio should be no more than 1.5.

From these criteria, the product of the two should not be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5, from which the equation was created (if you take the root of both sides, the equation becomes = The Graham Number = Fair Value of a Stock = Square Root of (22.5 x TTM Earnings per Share x MRQ Book Value per Share).

For each stock, we'll list the average "earnings surprise", based on the four most recently quarterly earnings reports.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.


These companies appear to be undervalued leading into earnings season, and they have a track record of beating analyst estimates…do you think there's upside surprise to be priced into these stocks?

1. ESCO Technologies Inc. (ESE): Produces and sells engineered products and systems for utility, industrial, aerospace, and commercial applications worldwide. In Sep 2010: Reported EPS at 0.89 vs. estimate at 0.81 (surprise of 9.9%). In Dec 2010: Reported EPS at 0.4 vs. estimate at 0.19 (surprise of 110.5%). In Mar 2011: Reported EPS at 0.49 vs. estimate at 0.37 (surprise of 32.4%). In Jun 2011: Reported 0.49 vs. estimate at 0.45 (surprise of 8.9%).

[Average earnings surprise at 40.42%].

Diluted TTM earnings per share at 2.27, and a MRQ book value per share value at 22.29, implies a Graham Number fair value = sqrt(22.5*2.27*22.29) = $33.74. Based on the stock's price at $26.93, this implies a potential upside of 25.29% from current levels.

2. Miller Industries Inc. (MLR): Engages in the manufacture and sale of vehicle towing and recovery equipment in North America and internationally. In Sep 2010: Reported EPS at 0.24 vs. estimate at 0.22 (surprise of 9.1%). In Dec 2010: Reported EPS at 0.3 vs. estimate at 0.28 (surprise of 7.1%). In Mar 2011: Reported EPS at 0.61 vs. estimate at 0.32 (surprise of 90.6%). In Jun 2011: Reported 0.47 vs. estimate at 0.31 (surprise of 51.6%).

[Average earnings surprise at 39.6%].

Diluted TTM earnings per share at 1.61, and a MRQ book value per share value at 13.73, implies a Graham Number fair value = sqrt(22.5*1.61*13.73) = $22.30. Based on the stock's price at $18.2, this implies a potential upside of 22.54% from current levels.

3. Orbital Sciences Corp. (ORB): Develops and manufactures small and medium-class rockets and space systems for commercial, military, and civil government customers. In Sep 2010: Reported EPS at 0.18 vs. estimate at 0.17 (surprise of 5.9%). In Dec 2010: Reported EPS at 0.36 vs. estimate at 0.23 (surprise of 56.5%). In Mar 2011: Reported EPS at 0.21 vs. estimate at 0.17 (surprise of 23.5%). In Jun 2011: Reported 0.36 vs. estimate at 0.22 (surprise of 63.6%).

[Average earnings surprise at 37.38%].

Diluted TTM earnings per share at 1.1, and a MRQ book value per share value at 10.4, implies a Graham Number fair value = sqrt(22.5*1.1*10.4) = $16.04. Based on the stock's price at $13.11, this implies a potential upside of 22.38% from current levels.

4. Viewpoint Financial Group (VPFG): Operates as the holding company for ViewPoint Bank, which provides financial services for consumers and businesses. In Sep 2010: Reported EPS at 0.17 vs. estimate at 0.09 (surprise of 88.9%). In Dec 2010: Reported EPS at 0.2 vs. estimate at 0.16 (surprise of 25%). In Mar 2011: Reported EPS at 0.2 vs. estimate at 0.19 (surprise of 5.3%). In Jun 2011: Reported 0.15 vs. estimate at 0.13 (surprise of 15.4%).

[Average earnings surprise at 33.65%].

Diluted TTM earnings per share at 0.72, and a MRQ book value per share value at 12.51, implies a Graham Number fair value = sqrt(22.5*0.72*12.51) = $14.24. Based on the stock's price at $12.04, this implies a potential upside of 18.24% from current levels.

5. KBR, Inc. (KBR): Operates as an engineering, construction, and services company supporting the energy, hydrocarbon, government services, minerals, civil infrastructure, power, and industrial sectors worldwide. In Sep 2010: Reported EPS at 0.62 vs. estimate at 0.43 (surprise of 44.2%). In Dec 2010: Reported EPS at 0.53 vs. estimate at 0.43 (surprise of 23.3%). In Mar 2011: Reported EPS at 0.69 vs. estimate at 0.53 (surprise of 30.2%). In Jun 2011: Reported 0.65 vs. estimate at 0.53 (surprise of 22.6%).

[Average earnings surprise at 30.08%].

Diluted TTM earnings per share at 2.47, and a MRQ book value per share value at 16.05, implies a Graham Number fair value = sqrt(22.5*2.47*16.05) = $29.87. Based on the stock's price at $25.76, this implies a potential upside of 15.94% from current levels.

6. EMC Insurance Group Inc. (EMCI): Provides property and casualty insurance, and reinsurance products in the United States. In Sep 2010: Reported EPS at 0.49 vs. estimate at 0.3 (surprise of 63.3%). In Dec 2010: Reported EPS at 0.74 vs. estimate at 0.7 (surprise of 5.7%). In Mar 2011: Reported EPS at -0.01 vs. estimate at -0.02 (surprise of 50%). In Jun 2011: Reported -1.05 vs. estimate at -1.06 (surprise of 0.9%).

[Average earnings surprise at 29.97%].

Diluted TTM earnings per share at 0.84, and a MRQ book value per share value at 28.06, implies a Graham Number fair value = sqrt(22.5*0.84*28.06) = $23.03. Based on the stock's price at $19.73, this implies a potential upside of 16.72% from current levels.

7. Ebix Inc. (EBIX): Provides on-demand software and e-commerce solutions to the insurance industry. In Sep 2010: Reported EPS at 0.43 vs. estimate at 0.32 (surprise of 34.4%). In Dec 2010: Reported EPS at 0.42 vs. estimate at 0.33 (surprise of 27.3%). In Mar 2011: Reported EPS at 0.37 vs. estimate at 0.33 (surprise of 12.1%). In Jun 2011: Reported 0.53 vs. estimate at 0.37 (surprise of 43.2%).

[Average earnings surprise at 29.25%].

Diluted TTM earnings per share at 1.75, and a MRQ book value per share value at 8.69, implies a Graham Number fair value = sqrt(22.5*1.75*8.69) = $18.50. Based on the stock's price at $14.79, this implies a potential upside of 25.07% from current levels.

8. AmTrust Financial Services, Inc. (AFSI): Operates as a multinational specialty property and casualty insurance company in the United States and internationally. In Sep 2010: Reported EPS at 0.57 vs. estimate at 0.52 (surprise of 9.6%). In Dec 2010: Reported EPS at 0.57 vs. estimate at 0.53 (surprise of 7.5%). In Mar 2011: Reported EPS at 0.76 vs. estimate at 0.55 (surprise of 38.2%). In Jun 2011: Reported 0.83 vs. estimate at 0.59 (surprise of 40.7%).

[Average earnings surprise at 24%].

Diluted TTM earnings per share at 2.76, and a MRQ book value per share value at 13.78, implies a Graham Number fair value = sqrt(22.5*2.76*13.78) = $29.25. Based on the stock's price at $22.75, this implies a potential upside of 28.58% from current levels.

9. Comtech Telecommunications Corp. (CMTL): Designs and produces a wide range of telecom systems and services. In Oct 2010: Reported EPS at 0.79 vs. estimate at 0.61 (surprise of 29.5%). In Jan 2011: Reported EPS at 0.52 vs. estimate at 0.4 (surprise of 30%). In Apr 2011: Reported EPS at 0.47 vs. estimate at 0.39 (surprise of 20.5%). In Jul 2011: Reported 0.42 vs. estimate at 0.37 (surprise of 13.5%.

[Average earnings surprise at 23.38%].

Diluted TTM earnings per share at 2.22, and a MRQ book value per share value at 25.83, implies a Graham Number fair value = sqrt(22.5*2.22*25.83) = $35.92. Based on the stock's price at $30.42, this implies a potential upside of 18.08% from current levels.

10. The Dow Chemical Company (DOW): The Dow Chemical Company manufactures and supplies products used as raw materials in the production of customer products and services worldwide. In Sep 2010: Reported EPS at 0.54 vs. estimate at 0.41 (surprise of 31.7%). In Dec 2010: Reported EPS at 0.47 vs. estimate at 0.35 (surprise of 34.3%). In Mar 2011: Reported EPS at 0.82 vs. estimate at 0.67 (surprise of 22.4%). In Jun 2011: Reported 0.85 vs. estimate at 0.81 (surprise of 4.9%).

[Average earnings surprise at 23.33%].

Diluted TTM earnings per share at 2.18, and a MRQ book value per share value at 17.09, implies a Graham Number fair value = sqrt(22.5*2.18*17.09) = $28.95. Based on the stock's price at $25.04, this implies a potential upside of 15.63% from current levels.

11. Photronics Inc. (PLAB): Engages in the manufacture and sale of photomasks primarily in the United States, Europe, and Asia. In Oct 2010: Reported EPS at 0.14 vs. estimate at 0.13 (surprise of 7.7%). In Jan 2011: Reported EPS at 0.2 vs. estimate at 0.18 (surprise of 11.1%). In Apr 2011: Reported EPS at 0.24 vs. estimate at 0.16 (surprise of 50%). In Jul 2011: Reported 0.23 vs. estimate at 0.19 (surprise of 21.1%).

[Average earnings surprise at 22.47%].

Diluted TTM earnings per share at 0.27, and a MRQ book value per share value at 8.7, implies a Graham Number fair value = sqrt(22.5*0.27*8.7) = $7.27. Based on the stock's price at $5.31, this implies a potential upside of 36.91% from current levels.

12. HealthSpring Inc. (HS-OLD): Operates as a managed care organization in the United States. In Sep 2010: Reported EPS at 0.95 vs. estimate at 0.83 (surprise of 14.5%). In Dec 2010: Reported EPS at 0.89 vs. estimate at 0.77 (surprise of 15.6%). In Mar 2011: Reported EPS at 0.75 vs. estimate at 0.59 (surprise of 27.1%). In Jun 2011: Reported 1.23 vs. estimate at 0.95 (surprise of 29.5%).

[Average earnings surprise at 21.68%].

Diluted TTM earnings per share at 3.85, and a MRQ book value per share value at 23.83, implies a Graham Number fair value = sqrt(22.5*3.85*23.83) = $45.43. Based on the stock's price at $35.83, this implies a potential upside of 26.81% from current levels.

13. Teledyne Technologies Inc. (TDY): Provides electronic components, instruments, and communications products in U. In Sep 2010: Reported EPS at 0.82 vs. estimate at 0.76 (surprise of 7.9%). In Dec 2010: Reported EPS at 0.99 vs. estimate at 0.8 (surprise of 23.7%). In Mar 2011: Reported EPS at 0.87 vs. estimate at 0.73 (surprise of 19.2%). In Jun 2011: Reported 1.04 vs. estimate at 0.77 (surprise of 35.1%.

[Average earnings surprise at 21.48%].

Diluted TTM earnings per share at 6.76, and a MRQ book value per share value at 27.4, implies a Graham Number fair value = sqrt(22.5*6.76*27.4) = $64.56. Based on the stock's price at $51.15, this implies a potential upside of 26.21% from current levels.

14. Rockwood Holdings Inc. (ROC): Develops, manufactures, and markets specialty chemicals and materials for industrial and commercial applications primarily in Germany, the United States, and Europe. In Sep 2010: Reported EPS at 0.55 vs. estimate at 0.54 (surprise of 1.9%). In Dec 2010: Reported EPS at 0.49 vs. estimate at 0.43 (surprise of 14%). In Mar 2011: Reported EPS at 0.88 vs. estimate at 0.61 (surprise of 44.3%). In Jun 2011: Reported 1.17 vs. estimate at 0.97 (surprise of 20.6%).

[Average earnings surprise at 20.2%].

Diluted TTM earnings per share at 5.34, and a MRQ book value per share value at 18.75, implies a Graham Number fair value = sqrt(22.5*5.34*18.75) = $47.46. Based on the stock's price at $38.32, this implies a potential upside of 23.86% from current levels.

15. FuelCell Energy Inc. (FCEL): Engages in the development, manufacturing, and sale of high temperature fuel cells for clean electric power generation primarily in South Korea, the United States, Germany, Canada, and Japan. In Oct 2010: Reported EPS at -0.11 vs. estimate at -0.14 (surprise of 21.4%). In Jan 2011: Reported EPS at -0.1 vs. estimate at -0.12 (surprise of 16.7%). In Apr 2011: Reported EPS at -0.1 vs. estimate at -0.12 (surprise of 16.7%). In Jul 2011: Reported -0.07 vs. estimate at -0.09 (surprise of 22.2%).

[Average earnings surprise at 19.25%].

Diluted TTM earnings per share at -0.53, and a MRQ book value per share value at -0.13, implies a Graham Number fair value = sqrt(22.5*-0.53*-0.13) = $1.25. Based on the stock's price at $0.94, this implies a potential upside of 32.46% from current levels.

16. TAL International Group, Inc. (TAL): Engages in the lease of intermodal containers and chassis. In Sep 2010: Reported EPS at 0.6 vs. estimate at 0.51 (surprise of 17.6%). In Dec 2010: Reported EPS at 0.76 vs. estimate at 0.63 (surprise of 20.6%). In Mar 2011: Reported EPS at 0.89 vs. estimate at 0.78 (surprise of 14.1%). In Jun 2011: Reported 0.99 vs. estimate at 0.82 (surprise of 20.7%).

[Average earnings surprise at 18.25%].

Diluted TTM earnings per share at 3.27, and a MRQ book value per share value at 16.2, implies a Graham Number fair value = sqrt(22.5*3.27*16.2) = $34.52. Based on the stock's price at $25.03, this implies a potential upside of 37.93% from current levels.

17. Materion Corporation (MTRN): Engages in the production and supply of high-performance engineered materials in the United States and internationally. In Sep 2010: Reported EPS at 0.65 vs. estimate at 0.5 (surprise of 30%). In Dec 2010: Reported EPS at 0.61 vs. estimate at 0.46 (surprise of 32.6%). In Mar 2011: Reported EPS at 0.57 vs. estimate at 0.54 (surprise of 5.6%). In Jun 2011: Reported 0.67 vs. estimate at 0.66 (surprise of 1.5%).

[Average earnings surprise at 17.42%].

Diluted TTM earnings per share at 2.48, and a MRQ book value per share value at 20.33, implies a Graham Number fair value = sqrt(22.5*2.48*20.33) = $33.68. Based on the stock's price at $24.18, this implies a potential upside of 39.29% from current levels.

18. Raymond James Financial Inc. (RJF): Engages in the underwriting, distribution, trading, and brokerage of equity and debt securities, as well as the sale of mutual funds and other investment products in the United States, Canada, and Europe. In Sep 2010: Reported EPS at 0.55 vs. estimate at 0.43 (surprise of 27.9%). In Dec 2010: Reported EPS at 0.65 vs. estimate at 0.53 (surprise of 22.6%). In Mar 2011: Reported EPS at 0.64 vs. estimate at 0.62 (surprise of 3.2%). In Jun 2011: Reported 0.37 vs. estimate at 0.33 (surprise of 12.1%).

[Average earnings surprise at 16.45%].

Diluted TTM earnings per share at 2.2, and a MRQ book value per share value at 20.22, implies a Graham Number fair value = sqrt(22.5*2.2*20.22) = $31.64. Based on the stock's price at $26.87, this implies a potential upside of 17.74% from current levels.

19. International Paper Co. (IP): Operates as a paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia, and north Africa. In Sep 2010: Reported EPS at 0.91 vs. estimate at 0.79 (surprise of 15.2%). In Dec 2010: Reported EPS at 0.68 vs. estimate at 0.65 (surprise of 4.6%). In Mar 2011: Reported EPS at 0.74 vs. estimate at 0.59 (surprise of 25.4%). In Jun 2011: Reported 0.8 vs. estimate at 0.67 (surprise of 19.4%).

[Average earnings surprise at 16.15%].

Diluted TTM earnings per share at 2.93, and a MRQ book value per share value at 17.63, implies a Graham Number fair value = sqrt(22.5*2.93*17.63) = $34.09. Based on the stock's price at $24.54, this implies a potential upside of 38.92% from current levels.

20. East West Bancorp, Inc. (EWBC): Operates as the holding company for East West Bank, which provides a range of personal and commercial banking services to small and medium-sized businesses, business executives, professionals, and other individuals in California. In Sep 2010: Reported EPS at 0.27 vs. estimate at 0.21 (surprise of 28.6%). In Dec 2010: Reported EPS at 0.35 vs. estimate at 0.29 (surprise of 20.7%). In Mar 2011: Reported EPS at 0.37 vs. estimate at 0.34 (surprise of 8.8%). In Jun 2011: Reported 0.39 vs. estimate at 0.37 (surprise of 5.4%).

[Average earnings surprise at 15.88%].

Diluted TTM earnings per share at 1.24, and a MRQ book value per share value at 14.63, implies a Graham Number fair value = sqrt(22.5*1.24*14.63) = $20.20. Based on the stock's price at $15.52, this implies a potential upside of 30.18% from current levels.

21. Timken Co. (TKR): Develops, manufactures, markets, and sells anti-friction bearings and related products and steel products primarily in the United States and Europe. In Sep 2010: Reported EPS at 0.8 vs. estimate at 0.67 (surprise of 19.4%). In Dec 2010: Reported EPS at 0.74 vs. estimate at 0.71 (surprise of 4.2%). In Mar 2011: Reported EPS at 1.13 vs. estimate at 0.86 (surprise of 31.4%). In Jun 2011: Reported 1.22 vs. estimate at 1.14 (surprise of 7%).

[Average earnings surprise at 15.5%].

Diluted TTM earnings per share at 3.99, and a MRQ book value per share value at 22.3, implies a Graham Number fair value = sqrt(22.5*3.99*22.3) = $44.74. Based on the stock's price at $35.95, this implies a potential upside of 24.46% from current levels.

*Earnings history sourced from Yahoo Finance, Graham equation inputs sourced from Google Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 21 Undervalued Stocks With A History Of Beating Earnings Estimates