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Nick Kraakman
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Hello, how awesome of you to read my bio! I'm Nick, a 23 years old MBA student who learned his most valuable lessons outside of university. I have been investing since I was 13 (yeah, I still can't believe the amount of trust my parents must have had in me). After losing half of my money by... More
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  • Intrinsic Value Table For The 10 Biggest Companies

    It is always interesting to see how the biggest companies in the world compare. Not only price/value wise, but also how healthy their financial statements are. Therefore I used Google Finance's stock screener to filter out the biggest market cap companies with a 5-year average return on equity of 15% or higher. I included return on equity in the screening process, because that increases our chances of finding some potential buy opportunities.

    The companies identified by the screener were then analyzed using Value Spreadsheet v2.1, which can calculate intrinsic values using three separate valuation models. In addition, this software assigns a score to the fundamentals of the company. The results of this analysis are listed in the table below.

    Ticker

    Price

    Intrinsic value

    Fundamentals *

    AAPL

    502.68

    1,344

    85

    XOM

    90.20

    67

    60

    GOOG

    711.32

    792

    80

    WMT

    68.85

    78

    70

    MSFT

    27.25

    48

    90

    CVX

    114.74

    65

    55

    IBM

    193.65

    285

    55

    JNJ

    72.90

    54

    60

    PG

    69.67

    53

    40

    KO

    37.51

    35

    70

    * Score out of a maximum of 100

    The table may require some further explanation. First off, it is ranked from high to a-bit-lower-but-still-very-high market cap. The intrinsic value column lists the average intrinsic value as calculated by the three valuation models included in Value Spreadsheet v2.1 (DCF, P/E, and ROE valuation models). The fundamentals column lists the score that the software assigned based on an analysis of ROE, debt levels, current ratio, book value growth, net margin stability, and growth perspectives. Now that that is out of the way, let us take a closer look at these ten mega-cap companies.

    Apple (AAPL)

    Interesting! It seems like Apple is trading at a steep discount to the intrinsic value estimate of $1,344. It should be noted that each of the three valuation models calculated a relatively similar intrinsic value, which makes this estimate more reliable. Also, its fundamentals seem to be very strong judging from the 85 (out of 100) grade. So why not a perfect 100 score? Well, because Apple's current ratio is slightly below the desired 2, and its expected growth rate for the coming five years is significantly lower than it was in the past five years. This seems only normal, since that 70% growth rate cannot be sustained very long, especially for a company the size of Apple.

    The reason Apple's shares have declined so much lately is because the company has had some trouble with its new map technology, and is losing some market share to competitors like Google (GOOG), Amazon (AMZN), and Microsoft (MSFT). However, everyone already knew that the technology sector is highly competitive, right? The fact is that they are expected to still own around 50% of the tablet market in 2016. In addition, Apple's iOS profit margins are way higher than the margins on Android. This might be an interesting stock to further look into.

    Exxon Mobil Corporation (XOM)

    Based on the analysis, we could conclude that Exxon Mobil is currently overvalued with a price of $90 and an intrinsic value of $67. However, the ROE valuation model gave a significantly higher value estimate, and was therefore omitted from the average. This makes this intrinsic value estimate less reliable. Book value per share is steadily increasing, but the net margin is fluctuating. This and a decreasing growth rate are causing the average 60 grade for Exxon's fundamentals.

    Google (GOOG)

    Google's fundamentals get a solid 80, which indicates that the company is in pristine financial health. Again, a slowing growth rate is preventing it from reaching a perfect 100. Google might still see its stock rise a bit further, but there is not a big enough margin of safety to consider buying.

    Wal-Mart Stores (WMT)

    As with Google, Wal-Mart seems reasonably priced at $69. However, its current ratio of 0.83 is alarmingly low. In addition, the company has a debt/equity ratio of 0.8. And although this is a manageable amount of debt, a level of 0.5 or below is ideal. Especially if the current ratio is not that high either. I would be careful with this one.

    Microsoft (MSFT)

    We have a winner! Well, at least on the fundamental side. The Value Spreadsheet software gives Microsoft a near-perfect 90. Only the PEG ratio is a bit high, but that's no biggie. Microsoft has a consistently high ROE and profit margin, and its tablets and Windows 8 software might give the company some nice growth prospects. Look into this one some more, because currently it seems to be trading at a nice discount to intrinsic value!

    Chevron Corporation (CVX)

    Another oil behemoth. The exact analysis I wrote for Exxon seems to apply for Chevron. Currently overvalued, but the ROE valuation gave a higher value. This skewed valuation is caused by these companies' high return on equity (>20%) relative to their low growth rates (<5%). Fundamentals are reasonable. Again, it are mainly the growth prospects which are causing the not-so-amazing grade of 55.

    International Business Machines Corp. (IBM)

    Ah, how I love IBM! This company creates amazing technology and is still the biggest patent holder in the world. Yes, they own more patents than Google, or Apple, or whichever company you could name. How is that for a competitive advantage? However, their balance sheet is not that great. IBM is highly leveraged, judging from its 1.6 debt/equity ratio. This fact alone is enough to deter me from coming near this stock.

    Johnson & Johnson (JNJ)

    When your are as big as Johnson & Johnson, it becomes more and more difficult to grow due to the law of diminishing returns. I believe this company is as big as it will ever get. This is a solid company, and this is reflected in the relatively high price in relation to its intrinsic value. The score for Johnson & Johnson's fundamentals seems not that high, but a big contributor is the sudden drop in the company's net profit margin (from 21% to 14%). Look into what caused this drop before you consider buying this stock.

    The Procter & Gamble Company (PG)

    Dear reader, meet the loser of our list. But is this company really that bad? Short answer: no it isn't. If we look closer at the numbers in the Value Spreadsheet analysis report, we see that 2012 showed a slight dip in profitability. Still, the company posts healthy figures. The debt/equity ratio is exactly 0.5 and the ROE is just below 15% in that year. Nothing too serious I'd say. However, with a price way above its intrinsic value estimate I would not waste too much time contemplating this stock and move on to an other opportunity in the market.

    The Coca-Cola Company (KO)

    Coca-Cola, one of Warren Buffett's favorites! He once said that he would decline if someone were to give him a big bag of money with the assignment to beat Coca-Cola at its own game. In Buffett's words: "It can't be done". He definitely had a point, although PepsiCo (PEP) is slowly closing in. Everyone seems to like Coca-Cola's products, and so many also like its shares. Therefore, it is currently fairly priced. The company's current ratio of 1.1 and debt/equity ratio of 0.9 are OK, but not optimal. Other than that, Coca-Cola is an amazing company, and because of that it does not trade at a discount to intrinsic value that often.

    Conclusion

    I hope you got some fresh ideas from reading this article. Something that has become very clear from this analysis is the fact that the bigger a company gets, the harder it becomes to grow. I'm going to make this kind of analysis a recurring thing. However, next time the focus will not be on mega-caps, but on a different kind of stocks. Any ideas or suggestions? Shout them out!

    If you want to read the complete analysis reports for each of the ten stocks described above, click here.

    Disclosure: I am long AAPL.

    Additional disclosure: Value Spreadsheet is developed by moi.

    Jan 18 12:31 AM | Link | Comment!
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