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Ben Graham Book Value Buys

 May 15, 2012 03:10 PM
 


by J. Royden Ward, editor Cabot Benjamin Graham Value Letter

Is book value per share important? By itself, no. But when compared to the company's stock price, it's enormously important. If a company's stock price is less than its book value per share, the company could theoretically be liquidated for more money than if sold on the stock exchange.

 Here's three of our favorite book value buys: Eaton (ETN), Fred's, Inc. ‘A' (FRED) and Thermo Fisher Scienti?c (TMO).

In addition, quality companies with low price-to-book value (P/BV) ratios have outperformed companies with higher valuations for the past three, ?ve and 10-year periods.

To ?nd the best companies with low P/BV ratios, I screened my database using several criteria: P/BV ratios less than 2.00; Value Line Financial Strength Ratings of B++ or better; low price-to-earnings (P/E) ratios; dividend yields of 1.0% or higher and good earnings prospects for the next 12-month and ?ve-year periods.

Founded in 1916, Eaton manufactures a variety of products including electrical systems and components for power management, truck transmissions and ?uid power systems.

It is the world's largest maker of engine valves for cars and small trucks. It also provides services for industrial, mobile and aircraft equipment.

Eaton's sales increased 13% and EPS soared 30% during the last 12 months, spurred by sales growth in all business segments and management's cost-saving measures.

I forecast sales growth of 7% and earnings growth of 13% during the next 12-month period. Sales in Europe will likely decline, but U.S. sales will more than pick up the slack.

With a forward P/E of just 9.8 and a dividend yield of 3.4%, ETN shares are clearly undervalued. Eaton has a strong balance sheet as evidenced by Value Line's Financial Strength Rating of A+.

I expect the stock price to reach my Minimum Sell Price of 76.73 within one to two years. ETN is low risk.

Founded in 1947 in Memphis, Fred's, Inc. ‘A' sells discount merchandise including household goods, pharmacy items, food, pet supplies, clothing and linens from 701 stores in 15 states in the Southeast and Midwest.

The stores also offer a large selection of generic drugs, which are in high demand and highly pro? table. Average store size is modest, about 14,400 square feet.

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