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Benjamin Clark
Benjamin Clark
Articles (281)  | Author's Website |

5 Overvalued Dow Components - June 2018

Coca-Cola, Exxon both make the list

June 12, 2018 | About:

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.

Defensive Investors are defined as investors who 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 Inc. (NYSE:CAT)

Caterpillar Inc. 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 ten years, and the high PEmg and price-book ratios. 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 (normalized earnings) decline from $5.79 in 2014 to an estimated $3.73 for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 17.01% 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 Inc. revealed the company was trading above its Graham Number of $63.57. The company pays a dividend of $3.10 per share, for a yield of 2% Its PEmg (price over earnings per share) was 42.51, which was above the industry average of 25.98. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-44.46.

Chevron Corp. (NYSE:CVX)

Chevron Corp. 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 (normalized earnings) decline from $11.43 in 2014 to an estimated $3.70 for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 10.98% 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 Chevron Corp. revealed the company was trading above its Graham Number of $0. The company pays a dividend of $4.32 per share, for a yield of 3.8%, putting it among the best dividend-paying stocks today. Its PEmg (price over earnings per share) was 30.47, which was below the industry average of 63.11, 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 $-41.7. 

General Electric Co. (NYSE:GE)

General Electric Co. 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 (normalized earnings) decline from $1.33 in 2014 to an estimated 30 cents for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 20.17% 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 General Electric Co. revealed the company was trading above its Graham Number of $12.12. The company pays a dividend of 84 cents per share, for a yield of 5.8%, putting it among the best dividend-paying stocks today. Its PEmg (price over earnings per share) was 48.84, which was above the industry average of 26.48. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-20.17. 

Exxon Mobil Corp. (NYSE:XOM)

Exxon Mobil Corp. 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. 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 $7.82 in 2013 to an estimated $3.97 for 2017. This level of demonstrated earnings growth does not support the market's implied estimate of 5.52% 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 Exxon Mobil Corp. revealed the company was trading above its Graham Number of $56.92. The company pays a dividend of $2.98 per share, for a yield of 3.8%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share) was 19.55, which was below the industry average of 63.11, 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 $-28.42. 

The Coca-Cola Co. (NYSE:KO)

The Coca-Cola Co. 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 price-book 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 $1.85 in 2014 to an estimated $1.37 for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 11.81% 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 The Coca-Cola Co. revealed the company was trading above its Graham Number of $13.43. The company pays a dividend of $1.48 per share, for a yield of 3.4%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share) was 32.11, which was below the industry average of 34.94, 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 $-7.94. 

Disclaimer:

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. 

About the author:

Benjamin Clark
Benjamin is one of TipRank's top bloggers. He is the founder of ModernGraham.com, a value investing website devoted to the study and modernization of the teachings of Benjamin Graham.

Visit Benjamin Clark's Website


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