There are so many great companies in the market today, but there are also many overvalued companies. By using the ModernGraham Valuation Model, I've selected five overvalued Dow Components reviewed by ModernGraham according to the ModernGraham approach.
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. Only speculators should pursue companies not suitable for either the Defensive Investor or the Enterprising Investor.
Caterpillar
Caterpillar Inc. (CAT, Financial) does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last 10 years and the high price-book (P/B) ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $6.2 in 2012 to an estimated $4.41 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 5.13% annual earnings growth over the next seven to 10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Caterpillar revealed the company was trading above its Graham Number of $41.25. The company pays a dividend of $3.08 per share for a yield of 3.7%, putting it among the best dividend-paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 18.75, which was below the industry average of 20.76. By some methods of valuation that makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-50.05. (See the full valuation.)
Chevron
Chevron Corp. (CVX, Financial) does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last 10 years and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg decline from $11.4 in 2012 to an estimated $4.68 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 6.82% annual earnings growth over the next seven to 10 years. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Chevron revealed the company was trading above its Graham Number of $0. The company pays a dividend of $4.28 per share, for a yield of 4.1%, putting it among the best dividend-paying stocks today. Its PEmg was 22.14, which was below the industry average of 55.24. By some methods of valuation that makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-43.72. (See the full valuation.)
ExxonMobil
ExxonMobil Corp. (XOM, Financial) does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and insufficient earnings growth over the last 10 years. The Enterprising Investor has concerns regarding the level of debt relative to the current assets and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg decline from $7.83 in 2012 to an estimated $4.85 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 4.18% annual earnings growth over the next seven to 10 years. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the price.
At the time of valuation, further research into ExxonMobil revealed the company was trading above its Graham Number of $43.35. The company pays a dividend of $2.96 per share, for a yield of 3.6%, putting it among the best dividend-paying stocks today. Its PEmg was 16.87, which was below the industry average of 69.19. By some methods of valuation that makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-30.12. (See the full valuation.)
General Electric
General Electric Co. (GE, Financial) does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last 10 years and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg decline from $1.22 in 2012 to an estimated 89 cents for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 14.14% annual earnings growth over the next seven to 10 years. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the price. (See the full valuation.)
Procter & Gamble
Procter & Gamble Co. (PG, Financial) does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last 10 years and the high PEmg and P/B ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $3.9 in 2012 to an estimated $3.44 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 8.2% annual earnings growth over the next seven to 10 years. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the price. (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:Â 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 that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer. This article first appeared on ModernGraham.
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