5 Overvalued Dow Components – February 2018

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 Inc. (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 PB 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 7-10 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 $3.1 per share, for a yield of 2% Its PEmg (price over earnings per share – ModernGraham) 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. (See the full valuation)