There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I've selected the five most undervalued Dow Components that are suitable for the Defensive Investor or the Enterprising Investor.
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 (although still low) level of risk. Each company suitable for Defensive Investors is also suitable for Enterprising Investors.
Travelers Companies
Travelers Companies Inc. (TRV, Financial) qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company's strong financial position. The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $5.48 in 2012 to an estimated $9.87 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.49% annual earnings growth over the next seven to 10 years. As a result, the ModernGraham valuation model, based on Graham's formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Travelers revealed the company was trading below its Graham Number of $134.38. The company pays a dividend of $1.95 per share for a yield of 1.7%. Its PEmg (price over earnings per share) was 11.48, which was below the industry average of 16.56, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)
American Express
American Express Co. (AXP, Financial) qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company's strong financial position. The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.43 in 2012 to an estimated $5.09 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.95% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price. (See the full valuation)
United Technologies
United Technologies Corp. (UTX, Financial) qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $5.17 in 2012 to an estimated $7.65 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 2.29% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price. (See the full valuation)
Boeing
Boeing Co. (BA, Financial) is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and high price-book (P/B) ratio. The Enterprising Investor is only concerned with the low current ratio. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.51 in 2012 to an estimated $7.35 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 4.67% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price. (See the full valuation)
Cisco Systems
Cisco Systems Inc. (CSCO, Financial) qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the poor dividend history. The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.3 in 2012 to an estimated $1.83 for 2016. This level of demonstrated earnings growth supports the market's implied estimate of 4.21% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Cisco Systems revealed the company was trading above its Graham Number of $24.42. The company pays a dividend of 89 cents per share for a yield of 2.9%, putting it among the best dividend-paying stocks today. Its PEmg was 16.91, which was below the industry average of 36.31, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $4.4. (See the full valuation)
What do you think? Are these companies a good value for Defensive Investors? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclosure: The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing those holdings within the next 72 hours.
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