7 Elite Companies To Research This Week

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Includes: AABA, EMN, ETN, FIS, LNC, UNH, UNM
by: Benjamin Clark

Summary

EMN, ETN, FIS, LNC, UNH, UNM, and YHOO are all rated as undervalued by the ModernGraham valuation model.

All seven qualify for the Enterprising Investor under the ModernGraham approach.

EMN, UNH, and UNM also qualify for the more conservative Defensive Investor.

ModernGraham currently covers over 370 companies in its Valuation Index, analyzing each in detail to determine whether they fit a modernized version of Benjamin Graham's conservative metrics from his classic The Intelligent Investor.

The site then proceeds to give each company a rating as suitable for Defensive Investors, those unwilling to conduct substantial research; Enterprising Investors, those happy to spend the time researching; or Speculators.

Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk. Each company suitable for the Defensive Investor is also suitable for Enterprising Investors.

To be considered by the Defensive Investor, a company must pass at least 6 of the following 7 tests.

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion
  2. Sufficiently Strong Financial Condition - current ratio greater than 2
  3. Earnings Stability - positive earnings per share for at least 10 straight years
  4. Dividend Record - has paid a dividend for at least 10 straight years
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period
  6. Moderate PEmg ratio (price over normalized earnings) - PEmg is less than 20
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50

Note: If the company is a financial or insurance company, test #2 regarding the financial condition is not required; however, the company must pass all six of the remaining tests.

To be considered by the Enterprising Investor, a company must pass at least 4 of the following 5 tests or be suitable for the Defensive Investor.

  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

Note: If the company is a financial or insurance company, tests #1 and #2 regarding the financial condition are not required; however, the company must pass all three of the remaining tests.

Each company is further analyzed using one of Graham's valuation formulas to determine whether it is undervalued, fairly valued, or overvalued by Mr. Market today. The ModernGraham valuation model is based on Benjamin Graham's formula, Intrinsic Value = EPS x (8.5 x 2g), and is intended to give a good estimate of a company's value. ModernGraham uses a normalized EPS figure ("EPSmg") based on the last five years of earnings data, and a cumulative average growth rate based on the change in EPSmg over the last five years. This article on ModernGraham explains some of the background of the formula and performs a simple back-test.

The following seven companies were found this week to be suitable for either Defensive Investors or Enterprising Investors (or both) and undervalued:

Eastman Chemical Company (NYSE:EMN)

Eastman Chemical Company qualifies for either the Defensive Investor or the Enterprising Investor. In fact, the only requirement of either investor type which the company does not pass is the Enterprising Investor's requirement of low debt to net current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.06 in 2010 to an estimated $5.63 for 2014. This strong level of demonstrated growth outpaces the market's implied estimate of 2.84% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value well above the price.

EMN Chart

EMN data by YCharts

Eaton Corporation (NYSE:ETN)

Eaton Corporation is suitable for Enterprising Investors but not for Defensive Investors. The Defensive Investor is concerned with the low current ratio and the lack of sufficient earnings growth over the last ten years. The Enterprising Investor is only concerned with the high level of debt relative to the current assets. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.49 in 2010 to an estimated $3.88 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 4.47% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

ETN Chart

ETN data by YCharts

Fidelity National Information Services (NYSE:FIS)

Fidelity National is suitable for Enterprising Investors but not for Defensive Investors. The Defensive Investor is concerned with the low current ratio and the high PEmg ratio. The Enterprising Investor is only concerned with the high level of debt relative to the net current assets. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.10 in 2010 to an estimated $2.13 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 8.70% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

FIS Chart

FIS data by YCharts

Lincoln National Corporation (NYSE:LNC)

Lincoln National is suitable for Enterprising Investor but not for Defensive Investors. The Defensive Investor is concerned by the insufficient earnings stability or growth over the last ten years, though the company passes all of the Enterprising Investor's requirements. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.42 in 2010 to an estimated $4.18 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 1.94% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham's formula, to return an estimate of intrinsic value above the market price.

LNC Chart

LNC data by YCharts

UnitedHealth Group (NYSE:UNH)

UnitedHealth Group is suitable for the Defensive Investor and therefore is also suitable for the Enterprising Investor. The Defensive Investor's only initial concern is the low current ratio, and the Enterprising Investor is willing to overlook concerns about the level of debt relative to the current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.36 in 2010 to an estimated $5.24 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 3.53% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

UNH Chart

UNH data by YCharts

Unum Group Inc. (NYSE:UNM)

Unum Group qualifies for either the Defensive Investor or the Enterprising Investor after passing all of the requirements of each investor type. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $2.25 in 2010 to only an estimated $2.99 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 1.47% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham's formula, to return an estimate of intrinsic value above the market price.

UNM Chart

UNM data by YCharts

Yahoo Inc. (YHOO)

Yahoo Inc. is suitable for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns regarding the company's lack of dividend payments, insufficient growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor's only concern is the lack of dividend payments. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.57 in 2010 to an estimated $1.47 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 8.03% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

YHOO Chart

YHOO data by YCharts

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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