3 buys for value investors

Here's a high-quality trio with steady growth, low risk and undervalued prices.

By TheStockAdvisors Jun 20, 2012 9:53AM
By J. Royden Ward, Cabot Benjamin Graham Value Letter

Our Modern Value Model portfolio is based on a strategy first developed by Benjamin Graham and Dr. Wilson Payne in 1946.

The model contains undervalued stocks of well-known, high-quality companies with steady earnings growth. Here's our latest three additions to the portfolio: Fiserv (FISV), ResMed (RMD) and Target (TGT).

Fiserv is a leading financial transaction processor supporting 18,000 financial institutions of all types. It is the largest processor of Internet banking transactions, a business that is growing rapidly.

Fiserv's new ZashPay and MobileMoney are finding strong demand. ZashPay customers can transfer money to and from other bank accounts using their computers. MobileMoney customers can transfer money using their smartphones.

FISV is somewhat recession resistant because 90% of revenue is derived from long-term contracts. Meanwhile, new U.S. banking regulations will create additional demand for Fiserv's services.

The shares are a bargain at 12.7 times my forward 12-month earnings per share estimate of 5.29. Fiserv is a well-managed company with a bright future in a rapidly growing market. I expect FISV shares to advance to my minimum sell price target of $98.36 within two years.

ResMed designs, manufactures and distributes medical equipment and supplies to diagnose and treat sleep-disordered breathing such as apnea.

ResMed has created rapid growth in the sleep-disordered breathing sector by educating physicians and sufferers about serious health problems caused by sleep disorders. Up to 90% of people who have existing problems remain undiagnosed and untreated.

The vast number of sufferers offers many opportunities for ResMed to create 13.5% earnings growth during the next several years. The shares are undervalued at 17.8 times forward 12-month EPS compared to the company's 10-year average P/E of 22.3.

ResMed is a leader within a segment of the healthcare industry that is in its infancy. I expect this very low risk stock to increase to my minimum sell price target of $40.38 within two years.

Target has remodeled 400 stores over the past 12 months, and plans to remodel another 230 stores during the next 12 months. Renovations include greatly expanded grocery sections to compete more effectively with Walmart.

In addition, Target is matching Walmart's low prices for many items. Target's new REDcard program offers everyday 5% discounts to cardholders, which has helped to boost sales.

In January, 2011, Target purchased 189 Zellers store leases for $1.9 billion. Also, Target will open about 130 new stores in Canada in 2013 to supplement its Zellers purchase.

The new Canadian operations will reduce Target's 2013 EPS by $0.50 per share, but add substantive sales and earnings thereafter.

Sales increased 6% and EPS advanced 9% during the past 12 months. Sales will likely climb 9%, but earnings will probably rise less than 4% during the next 12 months. The heavy investment in Canada will slow EPS growth during the next three to four quarters.

At 12.9 times my forward 12-month EPS estimate of 4.49, and yielding 2.3%, Target shares are undervalued. I expect this low risk stock price to reach my minimum sell price target of $77.55 within two years.

More from TheStockAdvisors
Jun 21, 2012 2:05AM
The Benjamin Graham stock screener (http://www.anahin.net/screener) gives a complete Graham analysis, for all 4000 stocks listed on the NYSE and NASDAQ.
Including all the above stocks.

Benjamin Graham was Warren Buffett's professor and mentor, and the original proponent of Value Investing.

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