By J. Royden Ward, Cabot Benjamin Graham Value Letter

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

Here are three of our favorite book-value buys: Eaton (ETN), Fred's, Inc. 'A' (FRED) and Thermo Fisher Scientific (TMO).

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

To find 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 five-year periods.

Founded in 1916, Eaton manufactures a variety of products including electrical systems and components for power management, truck transmissions and fluid 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 earnings per share (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%, exchange-traded note (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, Freds, 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 profitable. Average store size is modest, about 14,400 square feet.

U.S. consumers continue to seek bargains when shopping for food, clothing and household items, even though the economy is improving. Major retailers are aggressively cutting prices to compete for each retail dollar.

Sellers of luxury goods and high-end merchandise, such as Saks, Tiffany's and Coach, are producing solid sales, but their stock prices are too high. The stock prices of discount and dollar store companies such as Ross Stores, T J Maxx, Dollar Tree and others that are enjoying strong sales are also too high to buy right now. Fred's is a small discount retailer with sales of less than $2 billion, and its stock price is very reasonable.

Same-store sales have been flat during recent months, but I expect much better sales growth during the next several quarters as Fred's has opened 26 new stores in 2011 and has renovated 413 stores during the past two years.

I expect sales to increase 7% and earnings to rise 12% during the next 12 months. The retailer has added pharmacies to half of its stores and is working to add pharmacies to most of its remaining stores.

In addition, Fred's will continue to open many new stores and renovate existing stores. FRED shares are undervalued at 1.07 times book value and at 13.5 times forward earnings per share.

The Value Line Financial Strength Rating is B++, and the dividend yield of 1.8% is decent. I expect the strong demand for merchandise offered at low prices to continue during the next several years. I advise buying FRED at or below $14.93 and selling when the stock price hits $21.11. FRED shares are low risk.

Thermo Fisher Scientific was created in 2006 when Thermo Scientific and Fisher Scientific merged. The combined company is a leading provider of life science and laboratory analytical instruments, equipment, reagents and supplies. Thermo Fisher also provides software and services for medical and scientific research laboratories.

Management is focusing on further expanding operations in China, India and Brazil to enhance growth. In addition, exciting new products and recent acquisitions will boost Thermo Fisher's sales and earnings.

Sales increased 10% and EPS rose 20% during the last 12 months. Sales will likely advance 7% and EPS 12% or more during the next 12 months. The price-to-book value ratio for TMO is 1.28 which is low for a health care company. At 10.8 times forward 12-month EPS, TMO shares are inexpensive.

I advise buying Thermo Fisher at $54.80 or below and selling when my Minimum Sell Price of $79.45 is achieved. TMO is low risk.

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