Best Companies of the IT Hardware IndustryWhile ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself. With that in mind, this article will take a brief look at the best value stocks of the IT Hardware industry, selecting the five most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 500 companies reviewed by ModernGraham, 35 were identified as being closely related to the financial services industry. Of those, only three are suitable for the Defensive Investor, twenty-three are suitable for the Enterprising Investor, and the remaining nine are considered speculative at this time. Excluding any extreme outliers, the average company was rated as being priced at 127.16% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 23.98. The industry as a whole, therefore would appear to be overvalued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as the most undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

Arrow Electronics Inc. (ARW)

Arrow Electronics Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, the insufficient earnings stability over the last ten years and the lack of dividends. The Enterprising Investor is only concerned by the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.54 in 2011 to an estimated $4.94 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.98% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

SanDisk Corporation (SNDK)

SanDisk Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last ten years, and the inconsistent dividend history. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.04 in 2011 to an estimated $3.20 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.61% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Seagate Technology PLC (STX)

Seagate Technology PLC qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, the short dividend history, and the high PB ratio. The Enterprising Investor is only initially concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.39 in 2012 to an estimated $4.63 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.11% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

TE Connectivity Limited (TEL)

TE Connectivity Limited qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, the insufficient earnings stability over the last ten years and the short dividend history. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.57 in 2012 to an estimated $3.70 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.7% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Western Digital Corporation (WDC)

Western Digital Corporation passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only concerned by the short dividend history, while the Enterprising Investor has no initial concerns. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $3.71 in 2011 to an estimated $5.80 for 2015. This is a fairly strong level of demonstrated growth and outpaces the market’s implied estimate for annual earnings growth of 2.53% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 11.29% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that Western Digital Corporation is significantly undervalued at the present time. (See the full valuation)

The Good

The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:

Amphenol Corporation (APH)

Amphenol Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. Therefore, all Enterprising Investors should feel very comfortable proceeding with the next stage of the analysis, which is a determination of an estimate of intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $1.29 in 2011 to an estimated $2.12 for 2015. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 9.24% over the next 7-10 years. (See the full valuation)

Avago Technologies Ltd (AVGO)

Avago Technologies Ltd qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the short history as a publicly traded company, short dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only initially concerned with

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