Contender number 2: Universal Corp (NYSE:UVV)
Up next is Universal Corp (NYSE:UVV) , a producer of tobacco that is sold to cigarette manufacturers throughout the world.
The company has adequate size, with revenues over $2 billion, and is financially stable with a current ratio of 2 and working capital of just under $1.3 billion, compared to its total debt pile of $536 million.
As far as I can tell, the company has produced some earnings for the past nine years and has issued a dividend for the past 40 years. Over the past 10 years the company’s earnings per share have grown 83%, with three-year averages taken at the beginning and the end of the 10-year period.
Universal Corp (NYSE:UVV) has a trailing 12-month P/E ratio of 12.3 and a price-to-book ratio of 1.1, making the stock look like a perfect pick for Benjamin Graham.
Contender number 3: Weis Markets, Inc. (NYSE:WMK)
Weis Markets, Inc. (NYSE:WMK) meets the first criteria, generating over $2 billion in revenue during 2012. The company has a current ratio of 2.2 and no debt. Weis has produced some earnings for each of the past 12 years and has paid a dividend since 2000 (as far as my data goes).
Between 2002-2005 the company produced average EPS of $2.1 and between 2009-2012 the company produced average EPS of $2.8, which is a growth rate of 33% – only slightly above Graham’s criteria.
Weis currently trades at a P/E of 14 at the time of writing and a P/B of 1.4, both of which are both under Graham’s maximum limit.
The final test
As a rough guide, it is possible to use the Graham number to establish a price target for a share that could be a suitable Graham-style investment.
The Graham number came about as a way of calculating the fair value of a stock. If the current share price is under the calculated Graham number, then the stock is cheap and can be brought as a value investment. However, if the stock is trading above the Graham number, then the stock is expensive and should be sold.
Graham Number = Square Root of (22.5 x Book Value Per Share x Earnings Per Share)
The square root of 22.5 signifies Graham’s belief that the P/E ratio should not be greater than 15 and the P/B no greater than 1.5 (15*1.5=22.5), while still making allowances for either of those ratios to be slightly higher, if offset by the other.
So how do these three companies compare?
| Company | P/E ttm | EPS ttm | Book value per share | Graham Number |
|---|---|---|---|---|
| Weis Markets, Inc. (NYSE:WMK) | 13.8 | 3.1 | 29.6 | $45.4 |
| Universal Corp (NYSE:UVV) | 12.3 | 4.7 | 53.5 | $75.2 |
| HollyFrontier Corp (NYSE:HFC) | 6 | 8.4 | 29.7 | $74.9 |
All three companies are currently trading below their Graham numbers and offer some potential upside before a full valuation.
Summary
Graham’s criteria may be strict, but opportunities can be found in any market. It just requires a little extra work. At the time of writing, these three companies all meet the strict criteria and all offer prospective upside based on their low valuations and solid balance sheets.
The article 3 Investments That Benjamin Graham Might Like originally appeared on Fool.com.
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