Q4 Earnings Growth
This earnings season continues to be a story of growth. According to Zack’s Investment Research, 219 members of the S&P 500 have reported earnings as of Wednesday, February 1st. Total earnings from these companies have grown 5.4% in Q4 compared to 2.7% in Q3. Overall, S&P 500 member earnings are on pace to reach their highest level in nearly two years.
In light of these positive growth figures, we thought it would be interesting to search for stocks that appear undervalued based on an Earnings Power Value analysis.
Earnings Power Value
The Earnings Power Value (EPV) analysis is a quick way to estimate the fair value of a stock by making an assumption about the sustainability of earnings. The approach was popularized by Professor Bruce Greenwald in the book Value Investing: From Graham to Buffett and Beyond. The formula:
Value = Adjusted Earnings / Cost of Capital
As the formula suggests, future earnings growth is excluded from the calculation. Learn more about the Earnings Power Value Model.
5 Undervalued Stocks At Zero Growth
According to Yahoo finance, there are 875 companies expected to report earnings this week (2/6 - 2/10). However, only five appear to be trading below their fair value estimate derived from finbox.io’s EPV analysis: Gilead Sciences (NasdaqGS:GILD), News Corporation (NasdaqGS:NWSA), Viacom (NasdaqGS:VIAB), Whole Foods Market (NasdaqGS:WFM) and Teradata Corporation (NYSE:TDC).
Gilead is expected to report earnings on Tuesday and our EPV analysis implies a fair value of $114.47 per share. That's nearly 50% above the company's current trading price! This implies the market is expecting significant earnings erosion (approximately 5% per year).
<img src='http://res.cloudinary.com/finbox/image/upload/v1486084618/1_-_GILD_gbutlb.jpg' alt= ‘GILD EPV fair value estimate’>
News Corporation is expected to report earnings on Thursday and nine separate valuation analyses imply the stock’s almost 40% undervalued. Even at no earnings growth, the company still appears to be nearly 30% undervalued.
<img src='http://res.cloudinary.com/finbox/image/upload/v1486084618/2_-_NWSA_i7pznw.jpg' alt= ‘NWSA EPV fair value estimate’>
Nine cash flow analyses imply that Viacom is 19% undervalued. Interestingly, the EPV analysis concludes over 30% upside. The company is expected to report earnings on Thursday before the market opens.
<img src='http://res.cloudinary.com/finbox/image/upload/v1486084618/3_-_VIAB_v1erfv.jpg' alt= ‘VIAB EPV fair value estimate’>
Whole Foods Market is scheduled to report earnings on Wednesday after the market closes and the stock is currently trading near its 52-week low. If the company could sustain its current earnings level, the stock's intrinsic value would be closer to $40 per share.
<img src='http://res.cloudinary.com/finbox/image/upload/v1486084618/4_-_WFM_qpla8e.jpg' alt= ‘WFM EPV fair value estimate’>
Teradata is slated to report earnings on Thursday before the market opens. The EPV analysis implies about 17% margin of safety. However, Wall Street and the market expect future earnings to decline.
<img src='http://res.cloudinary.com/finbox/image/upload/v1486084618/5_-_TDC_jge56v.jpg' alt= ‘TDC EPV fair value estimate’>
The EPV model is not a perfect predictor of fair value, not unlike any other valuation model. However, the technique is quite useful for quickly getting a sense of the risk of investing in a company at the current price. With a few assumptions, you can quickly determine if a company justifies further research. Hence, it may be worth looking closer at some of the companies mentioned above.