Before just considering book value, we always look for more.  We looked for companies which are still expected to have respectable earnings growth.   Analysts expect next year earnings expansion ranging from Raytheon’s 12.8% to Kennametal’s 23.5% growth.  We have also considered a consensus price target from analysts for those companies which have implied upside for investors, and this group ranges from 16% to 33% upside.  We also only consider liquid issues, and the floor for this group was average daily trading volume exceeding 750,000 shares. Except where otherwise noted, the source for all performance and financial data is Finviz.com.

Eaton Corporation (NYSE: ETN) has a price to book value of 2.1  to 1.  Eaton’s market cap is almost $17 billion, ranking it second among these companies.  Its forward PE is about 10.5, placing it in the top-tier of these companies.  With a consensus target price of $60.96 from Thomson Reuters, Eaton has an implied upside exceeding 24%.  In Thursday trading Eaton’s shares closed at $48.85 and the 52-week price range is $30.65 to $56.12.  The power management company is now larger than what we would expect as an acquisition target as its market cap is north of $16 billion, so if you like Eaton it better be for its own merits. If analysts are right, that $60.96 would be an all-time high.  Our caveat in Eaton is that a substantial portion of its “value” in equity is tied to intangible assets and goodwill.

Kennametal Inc. (NYSE: KMT) posts a 2.2 to 1 price to book value.  This is sometimes a bit high by our count, but the specialty materials and metalworking outfit is one that has the right size and the right angle for many value investors.   Its market cap is $3.3 billion, making it the smallest company discussed here.  Its forward PE is less than 12.  With a consensus target price of $48.45, Kennametal has an implied upside of 19%.  In Thursday trading Kennametal shares closed at $40.63 and the 52-week trading range is $23.75 to $43.84.

Republic Services, Inc. (NYSE: RSG) boasts a 1.5 to 1 price to book value, best among these companies.  Imagine, value in garbage.  Its market cap is almost $12 billion.  Its forward PE is slightly less than 14.5 With a consensus target price of $36.17, Republic has an implied upside of 16%.  In yesterday’s trading Republic’s shares closed at $31.1, down 0.06%.  The 52-week price range is $27.33 to $33.10.  What is interesting about Republic is that its screened criteria made this one a stock which we said was one of our Ten Stocks To Own For The Next Decade.  Its rival Waste Management, Inc. (NYSE: WM) is often in the same boat and much of the value analysis is relative between the two companies.  This was also formerly a Warren Buffett stock, but it was still a Bill Gates holding when we last looked.

Raytheon Co. (NYSE: RTN)  sports a 1.7 to 1 price to book value. Its market cap exceeds $17 billion, largest among these companies.  Its forward PE is lower than 9, ranking it first among this list of companies.  With a consensus target price of $56.41, Raytheon has an implied upside of 16%. In Thursday trading Raytheon shares closed at $48.39, down 1.49%.  The 52-week price range is $41.60 to $52.67.  This defense stock was one of our higher-yield dividend defense stocks reviewed as the fighting in Libya escalated.  The maker of the Patriot Missile system and many other defense and war technologies also carries a large amount of goodwill and the reason it has low earnings multiples is because the Department of Defense is under significant budget pressure which is not going to go away.

Stanley Black & Decker, Inc. (NYSE: SWK) posts a 1.7 to 1 price to book value, placing it in the top-tier of these companies.  We do want to make the reminder that this tool-maker for builders and carpenters (and for you around your house) is now the “newly amalgamated” Stanley and Black & Decker after the merger.  The company is also still considered by many investors to be searching for acquisitions as well.  Its market cap is almost $12 billion and it carries a forward P/E ratio of less than 12.  With a consensus target price of $86.13, Stanley Black & Decker has an implied upside of 21%. In trading yesterday the company’s shares closed at $71.06 and the 52-week trading range is $47.64 to $77.75.

Timken Co. (NYSE: TKR)  posts a 2.3 to 1 price to book value. Its market cap is less than $5 billion, ranking it one of the smaller companies listed here.  The company is part of America’s core manufacturing as it makes bearings, seals, and many other internal components for machines and machinery.  Its forward PE is slightly greater than 10, placing it in the top-tier of these companies.  With a consensus target price of $64.86, the machine tool manufacturer has an implied upside of 33%.  In Thursday trading Timken’s shares closed at $48.65, and the 52-week price range is $24.45 to $57.60.  If the target price is realized by analysts, that will mark an all-time high.

While many companies have high balances of goodwill and intangible assets, we are currently looking for value among peers.  We are not considering liquidation values and therefore are not using the analogy that “You can’t pay your rent with goodwill.”

Warren Buffett was quoted back in the 1990s saying, “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.”  We don’t go along with the Buffett model of forever any longer, but you get the idea.

This is also not a value review digging through the garbage heap.  As one investment manager said at The Value Investing Congress when asked about how she starts her screens for finding value stocks, “Actually, I usually start my screens by seeing which stocks have been hitting 52-week lows for a while.”  There would not be a value category of the growth trajectory was never interrupted and if problems had not arisen.

Elsewhere in recent value picks looking for book value discounts:

• Looking for Deep Value in Basic Materials
• Banks, Tech, and Others close-to or under book value

JON C. OGG & JIM BERDOU

The Blackstone Group LP (NYSE: BX) Started as Buy at Citigroup.
ConocoPhillips (NYSE: COP) Maintained Buy on Focus List with $81 target at Argus.
Discovery Communications, Inc. (NASDAQ: DISCA) Started as Neutral at Credit Suisse.
General Growth Properties Inc. (NYSE: GGP) Raised to Outperform at Credit Suisse.
Hologic Inc. (NASDAQ: HOLX) replaced Allergan Inc. (NYSE: AGN) on the Convition Buy List at Goldman Sachs.
NVIDIA Corporation (NASDAQ: NVDA) Raised to Outperform as Bull of the Day at Zacks Investment Research.
Strayer Education (NASDAQ: STRA) was named the Bear of the Day at Zacks Investment Research.
Turkcell (NYSE: TKC) Cut to Underperform at Credit Suisse.
UnitedHealth Group Inc. (NYSE: UNH) Raised to Buy at Stifel Nicolaus.
United Rentals, Inc. (NYSE: URI) Started as Buy at Goldman Sachs.
Waste Management Inc. (NYSE: WM) Maintained BUY with $44 target at Argus.
WellPoint Inc. (NYSE: WLP) Raised to Buy at Stifel Nicolaus.

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JON C. OGG

The Houston-based garbage and waste management giant will pay the dividend in March with a formal date to be announced soon.  This marks the 7th consecutive year of a dividend hike.

The move follows a similar dividend hike from Republic Services, Inc. (NYSE: RSG) a quarter ago after it hiked its quarterly payout to $0.20 from $0.19.  The rival dividend from Republic probably has a lot more room to rise as that rate is 2.66% per year.  Rival Republic was also listed recently as one of our ten stocks to hold for the next decade, and that pick was very very close to being Waste Management.

So far, there has been no pre-market boost to Waste Management shares.

JON C. OGG

Aetna Inc. (NYSE: AET) Started as Hold at Jefferies.
Altria Group Inc. (NYSE: MO) Cut to Hold at Citigroup.
Bed Bath & Beyond, Inc. (NASDAQ: BBBY) Started as Neutral at Robert W. Baird.
Boeing Co. (NYSE: BA) Cut to Market Perform at Bernstein.
Clearwire Corporation (NASDAQ: CLWR) Raised to Neutral at BofA/Merrill Lynch.
Eaton Corp. (NYSE: ETN) Raised to Conviction Buy List at Goldman Sachs.
Humana Inc. (NYSE: HUM) Started At Hold By Jefferies
Melco Crown Entertainment Ltd. (NASDAQ: MPEL) Raised to Buy at Daiwa.
MetLife, Inc. (NYSE: MET) Cut to Equal-weight at Morgan Stanley.
NVIDIA Corporation (NASDAQ: NVDA) Raised to Buy at Needham.
Quiksilver Inc. (NYSE: ZQK) Cut to Underperform at FBR.
Republic Services, Inc. (NYSE: RSG) Started as Outperform at William Blair.
Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT) Started as Neutral at Janney.
UnitedHealth Group, Inc. (NYSE: UNH) Started as Hold at Jefferies.
Waste Management, Inc. (NYSE: WM) Started as Outperform at William Blair.
Williams-Sonoma Inc. (NYSE: WSM) Started as Outperform at Robert W. Baird.

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JON C. OGG

Fedex (NYSE: FDX) is off 3% to $83.14 on new that earnings were weaker than expected. The freight firm will cut 1,700 jobs.

The Williams Companies (NYSE: WMB) stock is off 2% after the firm disappointed Wall St. and said its adjusted 2010 earnings would be only $1 to $1.25 a share.

Rockwell Collins (NYSE: COL) is up a fraction to $58 after it announced that its fiscal year guidance was better than expected.

Cellular Tissue Holdings (NYSE: CLU) is up 57% to $12.45 on news that it will be bought by Clearwater Paper (NYSE: CLW)

Research In Motion (NASDAQ: RIMM) is off 1.1% on more news that it is losing market share to Apple Inc (NASDAQ: AAPL) and Google’s (NASDAQ: GOOG) Android.

Micron Technology (NYSE: MU) is up 1% after a 3% drop in yesterday’s trading.

Douglas A. McIntyre

We have included a full chart below with tickers, a 52-week range, P/E ratios, earnings and revenue expectations from Thomson Reuters, and even the dividend yields of each.

MONDAY

TUESDAY

WEDNESDAY

THURSDAY

FRIDAY

All estimates are from Thomson Reuters. Earnings dates are subject to change and some may have already changed. Earnings estimates may also be slightly altered between now and the formal earnings date as analysts change their estimates, particularly on those later in the week.

JON C. OGG

Today came the news that Gates’ confidant Michael Larson has joined Republic’s Board of Directors effective October 28, 2009, and Larson will also become a member of Republic’s Compensation Committee and its Nominating and Corporate Governance Committee.  Larson is the Business Manager of Cascade Investment and is the Chief Investment Officer for the Bill & Melinda Gates Foundation Trust.  In short, Bill Gates (or his investment funds) is not just going to be a mere large investor in the garbage sector.  That is an entrenchment into a company, and there seems to be a reason for it.

What is surprising is that Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) have not been involved in this investment after reviewing the Buffett holdings as of last quarter.   Republic shares are up about 0.8% today at $26.55 and the 52-week trading range is $15.05 to $28.35. The market cap is now around $10 billion, and the company does pay a dividend of $0.76 (worth some 2.9% yield today).  This also has nothing to do with Gates still having the largest stake in Microsoft Corporation (NASDAQ: MSFT).

One metric we always look for is the earnings and revenue projections from Wall Street.  Thomson Reuters lists $1.46 EPS as the 2009 earnings target and $1.67 EPS for the 2010 earnings target.  Those same annual targets for revenues are listed as $8.26 billion for 2009 and $8.51 billion for 2010.  As always, we are somewhat apprehensive about relying too deeply on analyst consensus data for at least a year after a merger because there can always be surprises on either side of the coin.

Rival Waste Management Inc. (NYSE: WM) posted a 11% drop in profits just yesterday.  Thomson Reuters is calling for growth in 2010 revenues for Waste Management, but that would still be lower than the combined annual revenues for at least each of the last three years.

Gates has been out in front of many major changes with a bit of a futurist investor mentality besides having built a software empire.  He is deeply entrenched with Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A).  He has invested in rail for its huge barriers to entry, he cleaned up in ethanol long before that became a hot sector and subsequent flop, and he invests in other businesses via Cascade.

The garbage sector has very large barriers to entry.  In many ways, the waste management sector is almost the same as a utility.  Many waste disposal companies have partial locks on long-term contracts with municipalities and businesses.  They are highly regulated and new operating permits won’t be handed out haphazardly in most markets.  Garbage and waste producers (like you and me) don’t care who picks up their trash nor where it goes.  The problem creating another barrier to entry is that there are landfill restrictions and most cities and counties do not want to open up new landfills because of the environmental issues and the political heat that comes up each time a new landfill is allowed.  In one sort, it is just like the issue of building a new refinery or a nuclear power plant… nobody wants it in their backyard.

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JON C. OGG

• Apple (AAPL) Cut to Equal Weight at Morgan Stanley.
• Bankrate (RATE) Cut to Neutral at Merriman Curhan Ford.
• ConocoPhillips (COP) Cut To Neutral at Goldman Sachs.
• Infinera (INFN) Cut To Sell at Goldman Sachs.
• Motorola (MOT) Cut to Hold at Citigroup.
• Smart Modular Tech (SMOD) Cut to Hold at Deutsche Bank.
• TheStreet.com (TSCM) Cut to Neutral at Merriman Curhan Ford.
• Thor Industries (THO) Cut to Underperform at Baird.
• Washington Mutual (WM) Cut to Underperform at KBW.
• Winnebago Industries (WGO) Cut to Underperform at Baird.

Jon C. Ogg
September 29, 2008

Smithfield Foods (SFD) Credit concerns. Sells down to $13.95 from 52-week high of $32.26.

Sun (JAVA) Company shares continue to drift off on growth worries. Falls to $7.52 from 52-week high of $25.04.

Research in Motion (RIMM) Misses Wall St. forecast numbers. Plunges to $69.50 from 52-week high of $148.13.

NCC (NCC) Picks up worries from Washington Mutual collapse. Down to $2 from 52-week high of $27.21.

Marvell Tech (MRVL) Key supplier to RIMM. Drops to $9.57 from 52-week high of $18.84.

Last year, Wachovia (NYSE: WB) essentially doubled its brokerage andfinancial advisory business with its acquisition of A.G.Edwards.  Wachovia is more troubled than its crosstown rival Bank of America (NYSE: BAC), so this isstill an unfinished story.

JPMorgan Chase (NYSE: JPM) acquired Bear Stearns in a government-orchestrated buyout earlier this year, which arguably may havebeen a real estate grab more than an operational grab.  But much of thebrokerage, clearing, management and trading operations were kept.  It has alsojust bought the assets and deposits of Washington Mutual (NYSE: WM)this morning for a song.  Oddly enough, it was apparently willing to buy WaMu foraround $8.00 per share earlier this year.

Last weekend marked a monumental change in the bulge bracketbroker dealer and investment banking firms.  Goldman Sachs Group (NYSE:GS) and Morgan Stanley (NYSE: MS) changed their charters to bankholding companies.  Now, many think it is a matter of time beforethey start buying up cheap deposits.  Warren Buffett eveninvested $5 billion into Goldman Sachs this week.  Interestinglyenough, Morgan Stanley shed its Discovery credit card operations to getout of the credit card business, but it may be back in that businesssooner than anyone would have guessed a year ago.

Bank of America earlier had been exiting certainunderwriting and investment banking operations, but it has recently doubled down in its buyout of Merrill Lynch & Co. (NYSE:MER).  It also acquired Countrywide in ahighly criticized move.  We think that was possibly a mandated rescuepackage, but that is a different story entirely.  B of A is also upagainst the deposit ceiling caps imposed on U.S. banks, so new dealswill have to be elsewhere in the financial services sector.

So, take a look at Citi today.  It is a bank, credit card issuer and loan originator. The company also has investment brokers and financial planners,underwriting, and trading. CEO Vikram Pandit has laid-off some workers and hasrestructured its units.  But the financial supermarket model remains in tact.

JPMorgan is becoming even more of a major player, and is one of the healthiest on WallStreet and Main Street.  Bank of America is looking more and more like Citigroup, albeit a far more successfulversion.  When Goldman Sachs gets involved in a banking deal, then thatbusiness will be transformed too.  Unfortunately, the stocks ofWachovia and Morgan Stanley are being punished hard this morning after WaMu’sfailure as more concerns that their counterparty risks anddefault risks are rising faster than they can combat them.

Citigroup is going to be an interesting case study for the future atmany universities for their capstone classes.  Imagine having yourbusiness model vindicated after years of criticism, but still managingto fail in the execution and delivery.

Jon C. Ogg
September 26, 2008