NEW YORK (TheStreet) -- Earnings should be a key driver of any fundamental valuation. This week, a large number of companies will be releasing their quarterly earnings results. Here are three companies found to be undervalued by the ModernGraham valuation model and suitable for either the defensive investor (one who is not willing to undertake substantial research) or the enterprising investor (one who is willing to undertake substantial research).
Freeport-McMoRan Copper & Gold (FCX) is set to release its earnings premarket Thursday, and according to its latest ModernGraham valuation, the company does not pass the requirements of the defensive investor, as it has not consistently paid dividends over the last 10 years, and it has not shown earnings stability over the last 10 years. But it does pass the requirements of the enterprising investor, though it has a higher level of debt relative to current assets than the investor type likes to see.
From a valuation perspective, the ModernGraham valuation is affected significantly by the large earnings loss in 2008, which has caused the EPSmg (normalized earnings) -- EPSmg is a 5 year weighted average of the annual earnings per share figures -- figure for 2009 to be very low in relation to 2013. As it stands, the EPSmg have grown from a loss of $1.67 to a gain of $3.48, indicating a high level of growth that would appear to significantly outpace the market's implied estimate of 0.45% earnings growth. This has led the model to return an intrinsic value estimate that is well above the market price, and the overall result that the company is undervalued is supported by the valuation based on only 3% growth. If the company can demonstrate earnings greater than cents for the first quarter, this valuation should be even better.
Gannett (GCI) is scheduled to release its earnings premarket Wednesday, and in the latest ModernGraham valuation, the company was found to be suitable for Enterprising Investors, after having passed every requirement of the investor type except the debt to current assets requirement. The company does not qualify for defensive investors, however, because of the current ratio being too low, and the lack of earnings stability or sufficient growth over the 10 year period. From purely a valuation standpoint, the company appears undervalued, after growing EPSmg (normalized earnings) from a loss of $6.63 in 2008 to a gain of $1.94 for 2013. This level of growth significantly outpaces the market's current implied estimate of growth (2.70%), and the ModernGraham valuation model indicates a value around $74. If the company beats 44 cents, this valuation will be even higher.
KLA-Tencor (KLAC) will be releasing its earnings on Thursday after the market closes and according to the latest ModernGraham valuation, it is suitable for the enterprising investor, but is not suitable for the defensive investor. The company has shown insufficient earnings stability and trades at a PB ratio too high for the defensive investor; however, the company passes all of the enterprising investor's requirements. From a valuation side of things, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from 45 cents in 2010 to an estimated $3.65 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 4.81% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price. If the company can beat $1.07 for the quarter, the valuation will improve further.