Are There Any Deals Among The Dividend Challengers? Part II

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Includes: DPS-OLD, DSW, DTE, EDR, EE, EEP, EFX, EL, EMCF, EMCI, EMN, ENH, ENLC, ENLK, ENSG, EPR, EQM, ESCA, ETH, ETN, EVBN, EVR, EWBC, EXR, FAF, FCBI, FDEF, FFG, FFIN, FIBK, FINL, FISI, FITB, FL, FLIR, FLXS, FMBH, FMC, FNHC, FNV, FORR, FUN, FXCB, GATX, GE, GFF, GGP, GIL, GLW, GME, GMLP, GNC, GNTX, GPI, GPN, GRMN, GRRB, GXP, HAR, HBAN, HBNC, HCI, HD, HEI, HFC, HFWA, HI, HIFS, HMN, HNI, HOG, HOMB, HON, HPQ, HRC, HST, HSY, HUBB, HUM, IBOC, IDCC, IEX, INDB, INGR, INTU, IP, IPHS, IR, IRM, ISBC, IVZ, JCI, JCOM, JLL, JMP, JNS, JPM, JWN, KALU, KEY, KIM, KINS, MAR, QRTEA, TCBK
by: Accelerating Dividends

Summary

A combination of the discounted cash flow, Graham valuation formula, EBIT and Katesenelson Absolute PE valuation methods were used to derive a fair value.

Out of another 104 dividend challengers covered in this article, 49 companies had a margin of safety above 0%.

A total of 20 dividend challengers have both an average and a median margin of safety greater than 25%.

INTRODUCTION

This is the second article where I use a four method valuation analysis to derive fair value estimates for the members of the dividend challengers from David Fish's Dividend Champion, Challenger and Contender list (available here). The previous articles of this series have covered:

  • Dividend champions (available here)
  • Dividend contenders (available here and here)
  • Dividend challengers (available here)
  • Commonly held dividend stocks (available here)

There are a total of 418 dividend challengers. The first article covered the first 104 companies in alphabetical order by ticker symbol from the CCC list. This article covers the next 104 dividend challengers.

For those of you who are new to this series, the valuation methods are described below.

THE VALUATION METHODS

DISCOUNTED CASH FLOW VALUATION

Discounted cash flow [DCF] is the most commonly known valuation tool. The DCF is a valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment.

BENJAMIN GRAHAM VALUATION FORMULA

The Graham number measures a stock's fundamental value by taking into account the company's earnings per share and book value per share. The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued, and thus worth investing in.

EBIT VALUATION

The EBIT Valuation model is primarily an income statement and balance sheet adjustment model to get the fair value of the equity of the stock. The EBIT model takes the EPS and reverse engineers it to come up with a normalized revenue number by reverse engineering all of the margins that it's been achieving until now. And then with that revenue, the main driver behind the model comes down to selecting the valuation multiple for what you want to apply to the stock. EBIT valuation is a simple way to perform a sum of the parts analysis. It takes into consideration revenues, operating margins, cash and equivalents, total debt and shares outstanding. EBIT also has the strength of recognizing that depreciation and amortization are real asset expenses.

KATESENELSON ABSOLUTE PE VALUATION

The Absolute PE valuation is made up of the earnings growth rate, dividend yield, business risk, financial risk and earnings visibility. Essentially, the Absolute PE takes the current PE and then adds or subtracts points to come up with an adjusted PE value. Rather than trying to calculate difficult growth projections, the Absolute PE reverse engineers the PE ratio to come up with a growth rate.

By using these methods, there are four fair values or intrinsic values calculated that take into consideration many different factors of a company. Each has its own strengths and weakness which makes it more powerful to consider all four valuation methods to determine a fair value for a stock.

ANALYSIS

The current price is the end of day closing price of May 2, 2016. Each of the valuation methods are found in separate columns. An average and median fair value is calculated using all four valuation methods. The margin of safety between the fair value and the current price is calculated using both the average and median fair value estimates. Those in red show that there is no margin of safety. Those in yellow suggest a margin of safety between 0% and 24.99%. Those in green suggest a margin of safety greater than 25%. A buy price is also included using a margin of safety of 25% from the average and median fair value estimates. The stocks are ordered alphabetically by ticker symbol.

Company

Ticker

Current Price

DCF

EBIT Valuation

Absolute PE

Graham Valuation

Average Fair Value

Average MOS

Average Buy Price (25% MOS)

Median Fair Value

Median MOS

Median Buy Price (25% MOS)

Dr Pepper Snapple Group

(NYSE:DPS-OLD)

$92.06

$59.85

$83.48

$111.48

$73.11

$81.98

-10.95%

$65.58

$78.30

-14.95%

$62.64

DSW Inc.

(NYSE:DSW)

$24.66

$29.73

$32.58

$29.54

$26.49

$29.59

19.97%

$23.67

$29.64

20.17%

$23.71

DTE Energy Company

(NYSE:DTE)

$90.13

$25.83

$73.61

$94.37

$65.03

$64.71

-28.20%

$51.77

$69.32

-23.09%

$55.46

Education Realty Trust Inc.

(NYSE:EDR)

$40.76

$0.10

$37.35

$46.57

$16.51

$25.13

-38.34%

$20.11

$26.93

-33.93%

$21.54

El Paso Electric Co.

(NYSE:EE)

$45.48

$8.97

$34.82

$41.61

$33.11

$29.63

-34.86%

$23.70

$33.97

-25.32%

$27.17

Enbridge Energy Partners LP

(NYSE:EEP)

$21.62

$0.46

$20.66

-$2.16

$10.42

$7.35

-66.03%

$5.88

$5.44

-74.84%

$4.35

Equifax Inc.

(NYSE:EFX)

$121.22

$51.08

$87.32

$138.53

$99.82

$94.19

-22.30%

$75.35

$93.57

-22.81%

$74.86

Estee Lauder Companies Inc.

(NYSE:EL)

$97.13

$58.53

$85.68

$121.98

$61.42

$81.90

-15.68%

$65.52

$73.55

-24.28%

$58.84

Emclaire Financial Corp.

(NASDAQ:EMCF)

$24.95

$5.82

$21.28

$30.01

-

$19.04

-23.70%

$15.23

$21.28

-14.71%

$17.02

EMC Insurance Group Inc.

(NASDAQ:EMCI)

$27.15

$94.51

$92.35

$37.16

$13.06

$59.27

118.31%

$47.42

$64.76

138.51%

$51.80

Eastman Chemical Co.

(NYSE:EMN)

$77.06

$68.00

$69.76

$88.35

$121.89

$87.00

12.90%

$69.60

$79.06

2.59%

$63.24

Endurance Specialty Holdings Ltd.

(NYSE:ENH)

$64.56

$188.54

$171.56

$84.96

$104.27

$137.33

112.72%

$109.87

$137.92

113.62%

$110.33

EnLink Midstream LLC

(NYSE:ENLC)

$14.15

-$14.65

$6.96

-$13.26

$6.29

-$3.67

-125.90%

-$2.93

-$3.49

-124.63%

-$2.79

EnLink Midstream Partners LP

(NYSE:ENLK)

$13.65

-$63.07

-$12.52

$0.99

$3.93

-$17.67

-229.43%

-$14.13

-$5.77

-142.23%

-$4.61

Ensign Group Inc.

(NASDAQ:ENSG)

$22.50

$23.61

$21.61

$22.25

$32.19

$24.92

10.73%

$19.93

$22.93

1.91%

$18.34

EPR Properties

(NYSE:EPR)

$67.06

$24.44

$43.93

$87.87

$66.86

$55.78

-16.83%

$44.62

$55.40

-17.39%

$44.32

EQT Midstream Partners LP

(NYSE:EQM)

$77.60

$62.10

$73.61

$100.27

$43.73

$69.93

-9.89%

$55.94

$67.86

-12.56%

$54.28

Escalade Inc.

(NASDAQ:ESCA)

$11.93

$18.82

$15.94

$14.58

$21.33

$17.67

48.09%

$14.13

$17.38

45.68%

$13.90

Ethan Allen Interiors Inc.

(NYSE:ETH)

$34.31

$32.15

$30.39

$41.17

$41.33

$36.26

5.68%

$29.01

$36.66

6.85%

$29.33

Eaton Corp. plc

(NYSE:ETN)

$63.46

$56.03

$66.03

$79.84

$64.56

$66.62

4.97%

$53.29

$65.30

2.89%

$52.24

Evans Bancorp Inc.

(NYSEMKT:EVBN)

$24.45

$13.73

$23.21

$31.51

$13.36

$20.45

-16.35%

$16.36

$18.47

-24.46%

$14.78

Evercore Partners Inc.

(NYSE:EVR)

$51.96

$12.69

$71.97

$60.41

$66.42

$52.87

1.76%

$42.30

$63.42

22.05%

$50.73

East West Bancorp

(NASDAQ:EWBC)

$37.86

$43.22

$40.19

$47.31

$50.45

$45.29

19.63%

$36.23

$45.27

19.56%

$36.21

Extra Space Storage Inc.

(NYSE:EXR)

$86.87

$13.97

$70.08

$93.97

$54.84

$58.22

-32.99%

$46.57

$62.46

-28.10%

$49.97

First American Financial Corp.

(NYSE:FAF)

$36.70

$81.32

$77.06

$49.40

$47.25

$63.76

73.73%

$51.01

$63.23

72.29%

$50.58

Frederick County Bancorp Inc.

(OTCPK:FCBI)

$22.60

$8.66

$6.32

-

-

$7.49

-66.86%

$5.99

$7.49

-66.86%

$5.99

First Defiance Financial Corp.

(NASDAQ:FDEF)

$39.48

$35.92

$35.71

$48.30

$48.71

$42.16

6.79%

$33.73

$42.11

6.66%

$33.69

FBL Financial Group Inc.

(NYSE:FFG)

$60.26

$375.83

$364.17

$77.76

$70.27

$222.01

268.42%

$177.61

$220.97

266.69%

$176.77

First Financial Bankshares Inc.

(NASDAQ:FFIN)

$32.67

$14.57

$29.62

$41.73

$26.77

$28.17

-13.77%

$22.54

$28.20

-13.70%

$22.56

First Interstate Bancsystem Inc.

(NASDAQ:FIBK)

$27.68

$29.57

$27.57

$33.96

$34.20

$31.33

13.17%

$25.06

$31.77

14.76%

$25.41

Finish Line Inc. (The)

(NASDAQ:FINL)

$19.85

$11.99

$31.48

$18.91

$31.79

$23.54

18.60%

$18.83

$25.20

26.93%

$20.16

Financial Institutions Inc.

(NASDAQ:FISI)

$27.98

$30.36

$35.45

$31.08

$29.09

$31.50

12.56%

$25.20

$30.72

9.79%

$24.58

Fifth Third Bancorp

(NASDAQ:FITB)

$18.45

$19.30

$20.63

$25.20

$24.07

$22.30

20.87%

$17.84

$22.35

21.14%

$17.88

Foot Locker Inc.

(NYSE:FL)

$62.04

$77.87

$59.90

$80.54

$90.62

$77.23

24.49%

$61.79

$79.21

27.67%

$63.36

Flir Systems Inc.

(NASDAQ:FLIR)

$30.56

$46.49

$31.22

$44.57

$35.33

$39.40

28.93%

$31.52

$39.95

30.73%

$31.96

Flexsteel Industries Inc.

(NASDAQ:FLXS)

$41.99

$29.57

$39.32

$51.33

$23.65

$35.97

-14.34%

$28.77

$34.45

-17.97%

$27.56

First Mid-Illinois Bancshares Inc.

(NASDAQ:FMBH)

$24.90

$18.69

$26.47

$28.93

$25.02

$24.78

-0.49%

$19.82

$25.75

3.39%

$20.60

FMC Corp.

(NYSE:FMC)

$43.62

$55.89

-$93.24

$5.42

$45.62

$3.42

-92.15%

$2.74

$25.52

-41.49%

$20.42

FNB Bancorp

(OTCQB:FNBG)

$28.74

$86.58

$29.95

-

-

$58.27

102.73%

$46.61

$58.27

102.73%

$46.61

Federated National Holding Co.

(NASDAQ:FNHC)

$19.05

$115.97

$49.97

$23.41

$70.80

$65.04

241.40%

$52.03

$60.39

216.98%

$48.31

Franco-Nevada Corp.

(NYSE:FNV)

$68.08

$21.71

$50.00

$136.31

$16.14

$56.04

-17.69%

$44.83

$35.86

-47.33%

$28.68

Forrester Research Inc.

(NASDAQ:FORR)

$33.79

$15.08

$36.02

$30.84

$23.57

$26.38

-21.94%

$21.10

$27.21

-19.49%

$21.76

Cedar Fair LP

(NYSE:FUN)

$58.61

$13.34

$52.95

$61.91

$56.82

$46.26

-21.08%

$37.00

$54.89

-6.36%

$43.91

Fox Chase Bancorp Inc.

(NASDAQ:FXCB)

$19.84

$6.77

$18.82

$22.32

$12.17

$15.02

-24.29%

$12.02

$15.50

-21.90%

$12.40

General Electric Co.

(NYSE:GE)

$30.89

-$23.33

$33.99

-$26.70

$27.55

$2.88

-90.68%

$2.30

$2.11

-93.17%

$1.69

Griffon Corp.

(NYSE:GFF)

$16.08

$0.55

$11.95

$15.55

$6.20

$8.56

-46.75%

$6.85

$9.08

-43.56%

$7.26

General Growth Properties Inc.

(NYSE:GGP)

$28.63

$25.88

$28.69

$34.22

$23.11

$27.98

-2.29%

$22.38

$27.29

-4.70%

$21.83

Gildan Activewear Inc.

(NYSE:GIL)

$31.27

$33.82

$28.54

$33.98

$35.28

$32.91

5.23%

$26.32

$33.90

8.41%

$27.12

Corning Inc.

(NYSE:GLW)

$18.81

$26.44

$24.54

$14.59

$24.17

$22.44

19.27%

$17.95

$24.36

29.48%

$19.48

GameStop Corp.

(NYSE:GME)

$32.36

$74.70

$34.37

$51.54

$75.49

$59.03

82.40%

$47.22

$63.12

95.06%

$50.50

Golar LNG Partners LP

(NASDAQ:GMLP)

$17.53

$26.34

$39.66

$46.95

$36.26

$37.30

112.79%

$29.84

$37.96

116.54%

$30.37

GATX Corp.

(NYSE:GMT)

$46.00

-$39.25

$57.03

$69.00

$100.03

$46.70

1.53%

$37.36

$63.02

36.99%

$50.41

GNC Holdings Inc.

(NYSE:GNC)

$26.02

$34.00

$42.99

$34.50

$51.22

$40.68

56.33%

$32.54

$38.75

48.90%

$31.00

Gentex Corp.

(NASDAQ:GNTX)

$16.22

$22.13

$18.55

$20.30

$22.18

$20.79

28.18%

$16.63

$21.22

30.80%

$16.97

Group 1 Automotive Inc.

(NYSE:GPI)

$64.37

$9.13

$73.99

$53.73

$158.17

$73.76

14.58%

$59.00

$63.86

-0.79%

$51.09

Garmin Ltd.

(NASDAQ:GRMN)

$43.10

$44.48

$49.65

$60.33

$29.95

$46.10

6.97%

$36.88

$47.07

9.20%

$37.65

GrandSouth Bancorp

(OTCQB:GRRB)

$13.00

$49.40

$2.65

-

-

$26.03

100.19%

$20.82

$26.03

100.19%

$20.82

Great Plains Energy Inc.

(NYSE:GXP)

$31.47

$7.52

$23.96

$33.70

$23.39

$22.14

-29.64%

$17.71

$23.68

-24.77%

$18.94

Harman International Industries Inc.

(NYSE:HAR)

$76.60

$105.52

$101.18

$91.56

$139.68

$109.49

42.93%

$87.59

$103.35

34.92%

$82.68

Huntington Bancshares Inc.

(NASDAQ:HBAN)

$10.19

$8.16

$10.36

$11.50

$13.49

$10.88

6.75%

$8.70

$10.93

7.26%

$8.74

Horizon Bancorp

(NASDAQ:HBNC)

$24.69

-$0.46

$23.09

$26.73

$29.16

$19.63

-20.49%

$15.70

$24.91

0.89%

$19.93

HCI Group Inc.

(NYSE:HCI)

$30.29

$165.18

$61.99

$62.44

$122.04

$102.91

239.76%

$82.33

$92.24

204.52%

$73.79

Home Depot Inc.

(NYSE:HD)

$136.05

$114.03

$118.83

$155.69

$134.35

$130.73

-3.91%

$104.58

$126.59

-6.95%

$101.27

HEICO Corp.

(NYSE:HEI)

$61.89

$33.18

$59.57

$66.51

$41.34

$50.15

-18.97%

$40.12

$50.46

-18.48%

$40.36

HollyFrontier Corp.

(NYSE:HFC)

$35.49

$29.64

$33.83

$41.62

$74.18

$44.82

26.28%

$35.85

$37.73

6.30%

$30.18

Heritage Financial Corp.

(NASDAQ:HFWA)

$18.30

$21.02

$15.30

$22.47

$22.33

$20.28

10.82%

$16.22

$21.68

18.44%

$17.34

Hillenbrand Inc.

(NYSE:HI)

$30.27

$27.40

$27.45

$34.49

$33.48

$30.71

1.44%

$24.56

$30.47

0.64%

$24.37

Hingham Institution for Savings

(NASDAQ:HIFS)

$129.90

-

-

-

-

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Horace Mann Educators Corp.

(NYSE:HMN)

$31.41

$227.45

$220.30

$39.75

$37.67

$131.29

318.00%

$105.03

$130.03

313.96%

$104.02

HNI Corp.

(NYSE:HNI)

$43.69

$26.64

$43.29

$52.22

$42.71

$41.22

-5.66%

$32.97

$43.00

-1.58%

$34.40

Harley-Davidson Inc.

(NYSE:HOG)

$48.32

$49.46

$54.87

$57.97

$70.55

$58.21

20.47%

$46.57

$56.42

16.76%

$45.14

Home Bancshares Inc.

(NASDAQ:HOMB)

$43.47

$27.84

$39.58

$47.20

$40.90

$38.88

-10.56%

$31.10

$40.24

-7.43%

$32.19

Honeywell International Inc.

(NYSE:HON)

$114.67

$95.18

$95.25

$148.43

$114.41

$113.32

-1.18%

$90.65

$104.83

-8.58%

$83.86

Starwood Hotels & Resorts Worldwide Inc.

(NYSE:HOT)

$82.12

$33.21

$72.86

$91.69

$43.60

$60.34

-26.52%

$48.27

$58.23

-29.09%

$46.58

HP Inc.

(NYSE:HPQ)

$12.12

$25.88

$13.24

$23.40

$15.42

$19.49

60.77%

$15.59

$19.41

60.15%

$15.53

Heartland Payment Systems Inc.

(NYSE:HPY)

$103.09

-

-

-

-

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Hill-Rom Holdings Inc.

(NYSE:HRC)

$48.09

$4.05

$43.22

$42.84

$79.68

$42.45

-11.73%

$33.96

$43.03

-10.52%

$34.42

HSN Inc.

(NASDAQ:HSNI)

$53.22

$71.14

$50.40

$72.19

$79.14

$68.22

28.18%

$54.57

$71.67

34.66%

$57.33

Host Hotels & Resorts Inc.

(NYSE:HST)

$16.01

$3.61

$19.04

$19.83

$12.19

$13.67

-14.63%

$10.93

$15.62

-2.47%

$12.49

Hershey Company

(NYSE:HSY)

$93.72

$27.16

$96.60

$99.81

$64.25

$71.96

-23.22%

$57.56

$80.43

-14.19%

$64.34

Hubbell Inc.

(NYSE:HUBB)

$106.14

$82.61

$103.17

$119.41

$89.94

$98.78

-6.93%

$79.03

$96.56

-9.03%

$77.24

Humana Inc.

(NYSE:HUM)

$177.61

$236.86

$235.68

$165.46

$194.00

$208.00

17.11%

$166.40

$214.84

20.96%

$171.87

International Bancshares Corp.

(NASDAQ:IBOC)

$26.53

$13.88

$24.64

$30.91

$11.60

$20.26

-23.64%

$16.21

$19.26

-27.40%

$15.41

IDEX Corp.

(NYSE:IEX)

$82.47

$64.28

$74.51

$95.52

$69.82

$76.03

-7.81%

$60.83

$72.17

-12.50%

$57.73

Independent Bancorp MA

(NASDAQ:INDB)

$47.54

$33.05

$44.21

$46.32

$39.00

$40.65

-14.50%

$32.52

$41.61

-12.48%

$33.28

Ingredion Inc.

(NYSE:INGR)

$114.99

$63.51

$87.31

$132.84

$61.34

$86.25

-24.99%

$69.00

$75.41

-34.42%

$60.33

Intuit Inc.

(NASDAQ:INTU)

$102.21

$42.02

$103.35

$84.85

$94.88

$81.28

-20.48%

$65.02

$89.87

-12.08%

$71.89

International Paper Co.

(NYSE:IP)

$43.46

$15.91

$35.82

$55.79

$51.44

$39.74

-8.56%

$31.79

$43.63

0.39%

$34.90

Innophos Holdings Inc.

(NASDAQ:IPHS)

$37.68

$21.76

$35.88

$40.82

$39.53

$34.50

-8.45%

$27.60

$37.71

0.07%

$30.16

Ingersoll-Rand plc

(NYSE:IR)

$66.14

$35.75

$63.88

$64.52

$68.75

$58.23

-11.97%

$46.58

$64.20

-2.93%

$51.36

Iron Mountain Inc.

(NYSE:IRM)

$36.60

-$3.41

$26.24

$35.92

$31.25

$22.50

-38.52%

$18.00

$28.75

-21.46%

$23.00

Investors Bancorp

(NASDAQ:ISBC)

$11.58

$1.01

$9.73

$12.63

$11.49

$8.72

-24.74%

$6.97

$10.61

-8.38%

$8.49

Invesco Limited

(NYSE:IVZ)

$31.06

$23.65

$24.11

$28.66

$48.43

$31.21

0.49%

$24.97

$26.39

-15.05%

$21.11

Johnson Controls Inc.

(NYSE:JCI)

$41.10

$39.70

$43.68

$13.86

$74.61

$42.96

4.53%

$34.37

$41.69

1.44%

$33.35

j2 Global Inc.

(NASDAQ:JCOM)

$64.09

$66.15

$66.72

$72.96

$111.02

$79.21

23.60%

$63.37

$69.84

8.97%

$55.87

Jones Lang Lasalle

(NYSE:JLL)

$116.68

$163.34

$146.34

$133.55

$179.55

$155.70

33.44%

$124.56

$154.84

32.70%

$123.87

JMP Group Inc.

(NYSE:JMP)

$5.15

-$2.59

$5.26

$25.41

$3.80

$7.97

54.76%

$6.38

$4.53

-12.04%

$3.62

Janus Capital Group Inc.

(NYSE:JNS)

$14.74

$17.28

$14.42

$18.77

$19.05

$17.38

17.91%

$13.90

$18.03

22.29%

$14.42

JPMorgan Chase & Co.

(NYSE:JPM)

$63.79

$40.66

$62.30

$81.23

$77.58

$65.44

2.59%

$52.35

$69.94

9.64%

$55.95

Nordstrom Inc.

(NYSE:JWN)

$51.59

$49.98

$62.30

$58.19

$56.24

$56.68

9.86%

$45.34

$57.22

10.90%

$45.77

Kaiser Aluminum Corp.

(NASDAQ:KALU)

$94.24

-$265.40

$66.96

$110.96

$122.72

$8.81

-90.65%

$7.05

$88.96

-5.60%

$71.17

KeyCorp

(NYSE:KEY)

$12.46

$10.05

$12.60

$13.50

$15.76

$12.98

4.15%

$10.38

$13.05

4.74%

$10.44

Kimco Realty Corp.

(NYSE:KIM)

$28.99

$19.10

$27.55

$52.18

$20.92

$29.94

3.27%

$23.95

$24.24

-16.40%

$19.39

Kingstone Companies Inc.

(NASDAQ:KINS)

$9.16

$19.40

$19.34

$12.74

$8.76

$15.06

64.41%

$12.05

$16.04

75.11%

$12.83

To access the table with the color coded scheme, I am providing readers with access to a Google Sheet (here).

Here are a couple of findings from this analysis:

  • There are a total of 49 companies that have an average and median margin of safety above 0%.
  • Of the 49 companies, 20 companies have an average and median margin of safety above 25%.
  • The breakdown by sector can be seen in the following chart. Stocks with a margin of safety above 25% are listed under the sector name.

  • There were 2 companies with insufficient data to complete all of the valuation methods (HIFS, HPY)
  • There were 4 companies with insufficient data to complete 1 or 2 of the valuation models (EMCF, FCBI, FNBG, GRRB)

In this next section, I am going to go over the 6 companies that have a MOS of at least 25%. There are a lot of options this time around so I will be taking a look at some companies that are less known.

HARMAN INTERNATIONAL INDUSTRIES INC.

HAR fair value

Harman International Industries, Inc. engages in designing, manufacturing and marketing audio and infotainment solutions for the automotive, consumer and professional markets supported by the brands, including AKG, Harman Kardon, Infinity, JBL, Lexicon, Mark Levinson, Martin, Revel, Selenium, Soundcraft, Studer and yurbuds. It operates through four segments: Infotainment, Lifestyle, Professional and Other.

HAR has an average fair value estimate of $109.49 representing an average margin of safety of 42.9% and the median fair value estimate of $103.35 represents a median margin of safety of 34.9%. The Graham valuation estimates that the stock could nearly double from current levels while the DCF and EBIT valuations estimate a 50.0% upside potential.

HAR has a current dividend of 1.91% and a payout ratio of 27.7%. The company last raised its dividend back on August 4, 2015 by 6.1%. HAR dividend growth rate is also decreasing. The company's 1 (7.9%) and 3 (44.6%) year dividend growth rates remain inconsistent. HAR has raised its dividend for the past 5 consecutive years.

The auto industry has been performing very well over the past year. This is positive news for HAR and many analysts believe that the continued strength in the auto industry will benefit the company as well. Many analysts have upgraded HAR to overweight or buy over the past several months. HAR has embarked on the auto industry's push to integrate connected technologies. HAR has partnered with Microsoft (NASDAQ:MSFT), Alphabet/Google (NASDAQ:GOOG) and Under Armour (NYSE:UA). HAR has also partnered with InterDigital (NASDAQ:IDCC). IDCC will provide a suite of standards-compliant IoT services. Why is this important? Because big companies such as CISCO (NASDAQ:CSCO) have been acquiring companies that provide IoT services. Amazon (NASDAQ:AMZN), IBM (NYSE:IBM) and MSFT have also unveiled IoT service offerings, thus HAR is making efforts to compete in this service offering. Along with partnering with companies, HAR has recently acquired the cybersecurity specialty firm TowerSec which will be integrated into HAR connected car division. HAR is not only involved in connected vehicles, but also provides connected technologies in the consumer space via its partnership with UA. HAR provides technology found in UA's data-tracking untethered running shoe and wireless headphones. The company is transitioning into broader connected technology company. However, not all is rosy with the company as a HAR executive was recently charged by the SEC for insider trading and the company was under scrutiny for waiting 18 months to tell the NHTSA about a security flaw that exposed over a million cars to remote hacking. HAR is still looking to limit the damage.

A review of HAR revenues, accounts receivables and inventory shows a slightly mixed trend. It is positive that all three are going up in sync however the accounts receivables is trending above revenues which means that the company is not necessarily struggling but that the company is not collecting the money it is owed to convert it into actual revenues. There is a risk that the companies that owe money could default on payments and force HAR to accept a loss. For this to be the best case scenario, it would be preferable to see the accounts receivable under the revenue line.

GNC HOLDINGS INC.

GNC fair value

GNC Holdings, Inc. is a global retailer of health and wellness products, including vitamins, minerals and herbal supplements products, sports nutrition products and diet products. The company operates through three segments: Retail, Franchise and Manufacturing/Wholesale.

GNC has an average potential upside of 56.3% and a median potential upside of 48.9%. The average fair value is estimated at $40.68 and the median fair value is estimated at $38.75. There is quite a bit of discrepancy between the valuation models to consider. The DCF and Absolute PE have the lowest while the Graham valuation estimates the stock could nearly double. The EBIT valuation is sitting in the middle. While future cash flows are being considered in the DCF valuation, the Graham valuation sees positive EPS and book value going forward. This is a case where a deeper analysis is required to better understand GNC's valuation and future growth.

GNC has an attractive dividend yield of 3.01% with a payout ratio of 28.8%. The company last raised its dividend on February 1, 2016 by 11.1%. This is slightly lower than the 1 (12.5%) and 3 (17.8%) year dividend growth rates but remains attractive as well. For those following the Chowder rule, this stock qualifies. GNC has now paid a dividend for 5 consecutive years.

The biggest news coming out of GNC is that the company has announced that it has undertaken a strategic review and financial options in order to increase shareholder value. The board has brought in Goldman Sachs to help with the process. The company also has a goal to unload 200 stores this year. Unloading these 200 stores would only represent about 2% of the company's 9000 locations. However, the company plans to reduce its store count by a thousand over the next 3-4 years. GNC reported that there has been a lack of vitamin demand which led to increasing inventory levels which ultimately began impacting on their margins. 2015 was a year where a great deal of debate arose regarding the use of vitamins. Documentaries such as " The curious case of vitamins and me" is only but one example of vitamins use being questioned. This documentary was followed by the announcement from the US Department of Justice that it had indicted executives from privately held USPlabs for criminal conspiracy to distribute toxic substances contained in some of their dietary supplements. A coalition of state attorneys general launched a probe into herbal supplement makers to ensure that the manufacturers and retailers comply with the law. In the end, the Oregon attorney general filed a lawsuit against GNC accusing the company of spiking herbal supplements while the New York attorney general's office confirmed that GNC's products were compliant with FDA regulations.

These issues do not appear to have had a significant impact on margins as the figure below demonstrates. Gross margins have remained fairly consistent since 2011 while the operating and net profit margins have been impacted.

The issue with inventory is obvious as demonstrated in the next figure. Inventory has now surpassed revenues which is a negative indicator. GNCs average age of inventory has gone from 61.30 days in 2008 to 124.09 days in 2015. The cash conversion cycle has also increased, going from 80.9 in 2008 to 89.1 in 2015 although this is a decrease from its peak of 98.4 in 2014. The cash conversion cycle is basically a measure of how long cash is tied up in working capital.

GAMESTOP CORP.

GME fair value

GameStop Corp. operates as a multichannel video game, consumer electronics and wireless services retailer, which offers customers the most popular games, hardware and game accessories for next generation video game systems and the PC. The company sells new and pre-owned video game hardware, physical and digital video game software, accessories, as well as PC entertainment software, new and pre-owned mobile and consumer electronics products and other merchandise.

GME has one of the more attractive margins of safety presently. The average margin of safety is 82.4% while the median margin of safety is 95.1%. The average fair value estimate is $59.03 and the median fair value estimate is $63.12. The EBIT valuation estimates that GME is already near is fair valuation while the DCF and Graham valuations estimate that the stock could more than double from its current price.

GME current dividend is a very attractive 4.81% with a payout ratio of 38.1%. GME increased its dividend by 2.8% on February 23, 2016. This is a disappointing increase despite its high dividend yield. The recent increase was well below the 1 (9.1%) and 3 (21.6%) year dividend growth rates. GME has now raised its dividend for 5 consecutive years.

GME is a retailer serving a specific industry. Therefore, when consumer spending decreases, retailers like GME are affected and investors have a tendency to sell off. GME recently offered soft guidance with sales growth coming in between 0%-3% (compared to 2.8% consensus) and same-store sales are expected to be flat or down 3% for FY2016. This guidance appears to reflect the decrease of foot traffic in general at retailers and consumer spending trends. However, SA contributor George PUTNAM believes that a value screen of retail stocks may be oversold due to the focus by investors on weak comparable-store sales growth and F/X pressure. These two trends are expected by some analysts to reverse this year. GME made the cut of a value screen with a forward P/E of less than 12, a dividend yield of over 2% and a balance sheet ratio above the sector average. GME was dropped last month from the S&P 500 and moved into the MidCap 400. GME has set a goal at its recent Investors Day event to earn more than 50% of its revenue from outside of the physical games business by 2019. GME is planning and committed to increasing its relevancy in the mobile and consumer electronics space. It has also created a new video game publishing division called GameTrust and appears to be in discussions with at least 20 publishers over potential partnerships. GME is also dependent on major console makers such as Nintendo (OTCPK:NTDOF), Sony (NYSE:SNE) and MSFT. The company had its BB+ rating reaffirmed on March 3, 2016 but S&P expects GMEs credit metrics to deteriorate as a result of the company's increasingly aggressive financial policy.

Taking a look at some of the valuation ratios supports that the company may be of value at the moment. The company is not a free cash flow generating machine (as per the FCF/S ratio) however the free cash flow and operating cash flows are amply capable of paying the dividend. GME's ROE, ROA and ROIC are currently at the highest they have been in the past 10 years. The current CROIC is actually the median of the past 5 years. But upon a closer look over a 10 year period, the company has been able in 8 of those years to convert more invested dollars into free cash flow which is a more positive indicator.

GME valuation ratios

FLIR SYSTEMS INC.

FLIR fair value

FLIR Systems, Inc. engages in the design, development, marketing, and distribution of thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems. It operates through six segments: Surveillance, Instruments, OEM (Original Equipment Manufacturing), Maritime, Security and Detection.

FLIR has an average fair value estimate of $39.40 and a median fair value estimate of $39.95 which represents an average margin of safety of 28.9% and a median margin of safety of 30.7% respectively. The EBIT valuation estimates that FLIR is nearing fair value and while the Graham valuation estimates that FLIR has a little upside potential. The DCF and Absolute PE valuations estimates that FLIR has a potential upside of about 50%.

FLIR has a current dividend yield of 1.58% with a payout ratio of 25.63%. The company last increased its dividend 8.3% back on 2016-02-11 which represents the 6 consecutive annual dividend increases. The last dividend increase was less than the 1 (10.0%) and 3 (16.3%) year dividend growth rates.

FLIR is one of those stocks that does not receive much coverage from contributors on Seeking Alpha and there is little in terms of news coverage as well. However there have been some interesting announcements involving FLIR. FLIR made the camera that is found in the world's first smartphone with a built-in thermal camera. FLIR displayed two of its thermal cameras at the recent Consumer Electronics Shoe. FLIR has received two upgrades from analysts in the past few months. One of the analysts from Goldman stated that FLIR is well positioned to benefit from the growth in the US Defense Department's budget, that the company traded at a discount to its larger peers and FLIR will grow its dividends and buybacks. FLIR also acquired DVTEL in November 2015. DVTEL specializes in video surveillance.

FLIR has some very impressive valuation ratios. The company has become a free cash flow generating machine with its FCF/S ratio rising above 10% in 2015 and appears primed to continue its growth in 2016. The FCF yield shows that the company's market capitalization is increasingly growing from its free cash flow and has improved 5x since 2013 alone. The ROE is an impressive 71.4% and has grown steadily over the years. The downside is the ROA which has been decreasing since 2013 suggesting that the company is becoming less efficient in generating returns with the assets it has. The ROIC has also remained static but the CROIC shows that the company has been able to generate increasing returns for every dollar of FCF it invests.

FLIR valuation ratios

ESCALADE INC.

ESCA fair value

Escalade, Inc. engages in the provision of manufacturing and distribution of sporting goods. It operates through its sole segment which is sporting goods. It offers a range of sports products in the field of archery, table tennis, basketball, fitness, game tables, billiard, dart and other outdoor sports. It distributes its products through retailers, specialty dealers, key on-line retailers, traditional department stores and mass merchants.

ESCA has an average potential upside or margin of safety of 48.1% and a median potential upside or margin of safety of 45.7%. The average fair value estimate is $17.67 while the median fair value estimate is $17.38. There was no general consensus among the 4 valuation methods however the difference in fair value estimates varied by about $7. All of the valuation methods estimate that ESCA has some upside potential from its current price with the Graham Valuation estimating that the stock could nearly double.

ESCA has a very attractive 4.09% dividend yield with a 63.9% payout ratio. Investors may be anxiously waiting for the next dividend increase because the company last raised its dividend on April 28, 2015 by 10.0%. Although the last increase was lower than the 1 (13.2%), 3 (11.5%) and 5 (33.9%) year dividend grow rates, it was still nonetheless an attractive increase. However, the payout ratio is approaching levels where many dividend growth investors become concerned about the potential future dividend increases and the dividends sustainability. ESCA has raised its dividend for 6 consecutive years.

There has been no news issued from the company and there is only 9 articles written by SA contributors on ESCA since 2008. 2 of the articles were written in January of this year and were bullish on ESCA.

I consult the Piotroski F Score for companies that I am considering to gain an impression of the trend that the company is headed. The company has made steady improvements since the end of 2012 (the company reports semi-annually, hence why the years are doubled), but began to reverse in the beginning of 2015 and appears poised to continue its decline in the latter half of the reporting period. The bright spots include continual growth in net income and operating cash flows since 2011. ROA has increased in 7 out of the past 10 periods although 2015 appears poised to post declining ROA. The quality of earnings has increased since the beginning of 2014 whereas previously it was considered weak. One of the areas that the company has struggled with of late is the current ratio suggesting that the company may not have the ability to pay its short term liabilities with its current assets. ESCA has also been increasing its shares outstanding since 2014. Furthermore, gross margins have been rarely improved from one period to another while the asset turnover ratio has seen improvement in since 2013. The 2015 F Scores suggest that it was a difficult year and it would be prudent to review conference call transcripts to determine whether management has distinctive plans to rectify the situation. However, despite the generous dividend yield and dividend increases, the company appears to be facing some difficulties which, if not rectified, may have an impact on its dividend.

ESCA Piotroski F Score

GENTEX CORP.

GNTX fair value

Gentex Corporation designs, develops, manufactures, and markets electro-optical products for the automotive, commercial building, and aircraft industries primarily in the United States, Germany, and Japan. The Company's major segment involves designing, developing, manufacturing and marketing interior and exterior auto-dimming automotive rear view mirrors that utilize proprietary electrochromic technology to dim in proportion to the amount of headlight glare from trailing vehicle headlamps.

GNTX has an average fair value estimate of $20.79 representing an average margin of safety of 28.2%. The median fair value estimate is $21.22 representing a median margin of safety of 30.8%. There was a near consensus among the 4 valuation methods with less than $4 separating them all. This is an ideal scenario that instills confidence in the estimated margin of safety.

GNTX currently has a 2.11% dividend yield and a 31.1% dividend payout ratio. A dividend increase is likely on the way as the last increase which was 6.3% occurred on May 21, 2015. This was a disappointing increase compared to the dividend growth rate trend which was rising overall. The dividend growth rates were 10.0% (1 year), 9.0% (3 year) and 8.4% (5 year). GNTX has now raised its dividend for 5 consecutive years.

GNTX is also set to benefit from the increase in automobile sales over the past few years. In its most recent quarterly earnings, GNTX reported that automotive net sales rose 9% in Q1 primarily due to an 11% increase in auto-dimming mirror unit shipments. The company also witnessed increased sales in its dimmable aircraft windows (+42%) and fire protection products (+36%) during the quarter. This has been a trend that has been ongoing for several quarters now. SA contributors have been mostly bullish on the company since 2014.

GNTX has enjoyed some of the best revenue, accounts receivable and inventory trends that I have seen since 2013. Apart from 2011-2012, the company's revenue has generally remained above both the inventory and accounts receivables trend lines. In fact, since 2013, these three lines have generally followed each other in near perfect harmony except for the TTM. This is a bullish indicator on managements control over its operations.

The margins of GNTX are also following a similar trend and have been improving generally since the lows of 2008-2009. In fact, the gross margin is approaching the 40% mark which would indicate the company has a durable competitive advantage. Unfortunately, these margins cannot be compared to GNTXs main competitors because they are all privately held.

CONCLUSION

This group of dividend challengers provided many more companies to consider than the previous grouping and the dividend challengers overall are on pace to outnumber the total of dividend contenders and champions that have a margin of safety of at least 25%. Some dividend growth investors have a tendency to shy away from the dividend challengers because of the short dividend history however they are providing greater options of acquiring shares at discounted prices. There is reason for caution however as some have not raised their dividends in over a year while others face difficult challenges in their industry which may threaten the dividend. Overall, it could be suggested that the best dividend paying companies are rarely on sale to the point where a margin of safety of 25% or more is available without the market having tumbled being the primary cause. Performing ones due diligence may uncover the next dividend contender or champion and finding it now will mean years of dividend increases and passive income.

Part III will cover the next 104 dividend challengers.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Nothing in this article should be construed as a recommendation to buy, sell or short any equities.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.