I recently spent some time dissecting Benjamin Graham's The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.
However, a quick check can help determine whether or not a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. With that in mind, I screened the stocks of the S&P 500 that met those requirements and was presented with 53 companies. I will be making a CAPScall on most of these companies after comparing them to competitors and their current value in relation to their Graham numbers. Up next is business equipment maker Xerox (NYS: XRX) .
Who are they?
The Xerox name has become synonymous with the office copiers it first began selling in 1959. But there is more to the modern day Xerox than its copiers. It also offers consulting in a variety of areas, from helping a company go paperless in day-to-day operations to providing off-site IT solutions. It has some impressive image recognition technology that can rank photos using human-like judgment. It also markets printers to home users, though cheap ink combined with more expensive printers hasn't swayed many away from Hewlett-Packard (NYS: HPQ) , which has kept firm control on the printing industry since introducing one of the first commercial laser printers in 1984.
What's it worth?
Among the larger companies in its sector, Xerox is the only company that has a Graham number below its current price. Postage solutions company Pitney Bowes (NYS: PBI) does not have a Graham number due to a negative book value per share, and the other two on the list are well above their current number:
Book Value Per Share (MRQ)
Diebold (NYS: DBD)
VeriFone Systems (NYS: PAY)
Source: Yahoo! Finance and author's calculations.
Diebold, known primarily for its construction of ATMs, also provides customers with other security and software solutions. VeriFone, on the other hand, provides both the hardware and the software for businesses to accept credit card payments, acting as the intermediary between the banks providing money and the merchants accepting the credit cards. The company purchased a leading provider in mobile payment solutions, allowing it to add smartphone- and tablet-based solutions to its retail customers.
Three of the companies on the list pay a dividend, with Pitney Bowes checking in with a yield over 8%. At current prices, Diebold's yield of 3% also exceeds Xerox's modest 2.1% yield. However, as the chart above indicates, Diebold appears to be slightly overvalued at the moment, making Xerox a nice choice for dividend-conscious investors.
As Xerox is the only company in its niche sector with some room to grow, combined with its current yield over 2%, I think that it will continue plugging along for the near future. While you can't expect double-digit growth, it is a good bet that it will approach its Graham number. Therefore, I will be placing a "thumbs-up" over on my CAPS page in order to track this call and keep myself accountable. I will also be adding Xerox to My Watchlist to stay up to date on anything that may cause me to change my opinion of the company.
At the time thisarticle was published Fool contributor Robert Eberhard holds no position in any company mentioned. Click here to see his holdings and a short bio or follow him on Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.