Three Value Stocks That Appear Ridiculously Cheap

I don’t normally buy deep value, preferring instead an approach more like growth at a reasonable price, but three stocks with a real margin of safety have really caught my attention of late.

(1) Pfizer (PFE). The giant drug maker has been under siege for a while now due to fears about the company’s operations. Pfizer's leading drug, Lipitor, goes off patent protection in 2011. But the stock has just gotten ridiculously cheap.

The stock is trading around $12 with $1 in net cash and short term investments. They earned $2.43 last year and analysts are forecasting $2.07 in 2009. That represents a 5-6 forward multiple. We’re talking about an 18% earnings yield on this year’s earnings. This is not some backwater, second rate operation either. This is Pfizer.

Pfizer recently announced the acquisition of Wyeth (WYE) for $50 a share ($68 billion). I really like this move. They are using the current distress in the economy to pick up Wyeth, which has an excellent portfolio of drugs.

(2) Dell (DELL). Dell is trading for about $8.50 with about $3.50 in net cash and short term investments on the balance sheet. You get the business for $5. They earned $1.25 last year and analysts are forecasting $1.12 this year. Even if they only earn $1 that’s a 5 forward multiple. If they earn less, it’s still a cheap stock.

(3) eBay (EBAY). eBay is trading around $10.30 with $1.80 in net cash and short term investments. They earned $1.71 last year and analysts are forecasting $1.44 this year. That’s a 6 forward multiple. Even if they only earn $1.25, that’s a 7 forward multiple.

Each of these stocks is not only cheap, but highly profitable, with high quality of earnings and strong balance sheets with a ton of cash and little debt. None of them are remotely in danger of going out of business.

I think you get a real margin of safety with any of these stocks and I’m happy to hold them for the long term at these levels regardless of any negative short term price action.

No matter what happens with the stock price, the underlying reality is that these are real businesses, in the real world, with real assets and real business operations that continue to earn real profits. As a shareholder, those assets and profits are mine. At these prices, we’re talking about forward earnings yields in the high teens. Negative price action doesn’t have any effect on that.

The technicians can say whatever they want about the downtrending stock prices. What the technicians always miss is that behind these stocks are real businesses. And these real businesses are currently available at compelling valuations.

Disclosure: Top Gun is long Pfizer (PFE) and eBay (EBAY) and has no position in Dell (DELL).

Comments

[Tom Shohfi:]

I'm sorry, Greg, but this is short sighted fundamental analysis. All three of these companies have business issues and the earnings that the author refers to are likely at very tall peak. Valuation is important, but if you ignore what's happening with a business going forward, you'll find yourself holding an even cheaper stock soon. In my opinion, a ridiculously cheap stock in this market should be trading below tangible book with positive FCF for the foreseeable future. They may be inexpensive compared to prior days, but none of these stocks are close to that level.

PFE - Integration with Wyeth is going to take a while and may or may not work. While you are probably correct that Pfizer is smart to use its cash stockpile to pick up a new drug pipeline on the cheap, they have other big drugs besides Lipitor that are coming off of patents in the next few years. Their cash cow is drying up and the pipeline has nothing in it. Wyeth may or may not plug that enormous gap. Plus, they really need to execute to meet their aggressive cost savings targets.

DELL - If this is such a great business, why did IBM get out of it? Dell is trying to keep its gravy train growing through efficiency improvements rather than the innovative approach from its rivals. Look at AAPL's valuation and relative market position then tell me that DELL is cheap. See my comment and others at seekingalpha.com/autho... .

EBAY - Probably the least business risk, but will likely suffer with the reeling consumer and show its cyclical nature after years of strong growth. eBay's network effect is beginning to wane as power sellers look for a platform that offers them better terms. Meg Whitman is gone, top line growth is starting to stall and Wall Street hasn't been impressed with the performance of their acquisitions. It's hard to believe that GOOG has less dead goodwill on their books than EBAY. While analysts will normalize earnings, I wonder what the novice investor will think when they finally impair that garbage and post a massive loss.

Mar 03 03:30 AM

[H.J. Huneycutt:]

The analysis of Dell (DELL) ignores the fact that they have substantial liabilities on their Balance Sheet. In fact, the book value of the stock is only $2.14 per share, so to suggest you get the stock for $5 because they have $3.50 cash on hand overlooks the fact that they don't even technically *own* all of that $3.50.

Even the $2.14 figure is being a bit generous. If you scratch out their Goodwill and "Purchased Intangibles", their adjusted book value becomes $0.85 per share.

Their free cash flows still appear to be in alright shape, but notice the trend of the past four years has been decline. In what is starting to look like a depression, expect that to drop further as consumer PC purchases go down. Realistically speaking, you should brace yourself for a year with $1 or less per share in free cash flows and that might be considered a "good year" 3 years down the line.

Even that wouldn't be all that bad if it weren't for the fact that Dell's business model is not what it used to be. Dell used to make a killing producing high quality computers for reasonable prices. They kept prices low by innovating in areas such as Just-In-Time (JIT) Manufacturing. Yet, their competitors have caught up at this point and the quality of Dell's own computers has suffered over the past few years. Additionally, they are being undercut by low-cost netbooks from companies like Asus.

There's a reason Dell looks cheap. It's going downhill and its future prospects don't look nearly as bright as the past.

Mar 03 04:33 AM

[Top Gun:]

Trying to use a forward earnings stream has always been tough, and I have abandoned, years ago, those who use the technique with vigor. In today's world, predicting next month's costs is sometimes harder than predicting sales.

Please use something else besides the future, there is too much risk. To say the company has little debt and awesome free cash flow would be a good start, as would my favorite, cost of goods. If COGS are below 50%, a company has huge leeway to trim, even by cutting salaries in the short term. If COGS are 70% or greater, the company must cut production in order to continue cash flow. That's fine as long as large plants aren't involved.

Mar 03 07:24 AM

[Bob C:]

Damn Geg, You just posted this very same article under the name:
"Three Stocks with a Margin of Safety" on Monday.
Here is again on Tuesday with a different header!

Is this a daily thing until the stocks rise?
Good luck with that!!

Too bad SA doesn't have an analysis rating system so we wouldn't have to read any more of your biased garbage.

Mar 03 07:32 AM

[Allan kraig:]

Hey Greg, I got a good one for ya, Try to find the big CASH RESERVES eBay is boosting about!! You can't see it & you can't touch it.. Go to the 3rd qtr report to get a hint where it is .. The cash reserves in the US are run down to a minimum. The other billions are in a non disclosed off shore area, That is why they had to borrow to buy bill me later? Let me know if you find it .. If they truely do set on such reserves why did they lay off 1500+ employees, where many were their best & brightest long term employees including the leader of the eBay voices group? Kind of looks like shooting your self in the foot when you gut the voices program in such a time of need to save pocket change when your setting on billions in reserves .. Allan Kraig

Mar 03 08:52 AM

[Patricia013:]

Good post Allan - now watch them take delete it!! They've deleted 4 or 5 posts that started this comment thread! What's happening at seeking alpha lately....deleting comments so that people only see what you want them to see? How Ebayish can you get!!! I'd sure like to know why they're doing this because this is not the first time I've seen them delete comments!

Mar 03 12:06 PM

[Wake-Up!:]

I've witnessed it too Patricia013.

I've noticed my screen seems to be a bit "pink" these days while visiting Seeking Alpha anymore. I wonder if they want honest opinions or the same old media controlled garbage? Too bad we are censored so much in this "free" country.

"Three Value Stocks That Appear Ridiculously Cheap"

"Appear" being the key word here.

Mar 03 01:55 PM

[mrbill:]

If Dell and Ebay are so cheap, then why don't they pay any dividends? If things keep getting worse (as I believe will happen) that could be enough to bankrupt a company like Dell. They don't sell anything special: consumer PCs running Windoze. If you're standing in a soup line the last thing on your mind is a PC. On the other hand, the business operating the soup kitchen will likely need a few good servers, printers, and network switches (you know who I'm talking about). Not to mention some real customer support. Perhaps I'm exaggerating, but I think you get the point. I know Dell sells servers and switches, but lets face it, they are the flavor-of-the-month variety for small businesses.

Dell can be seen as the "solution looking for a problem". Sadly, they are redundant. The real question is, how low can it go?

Mar 04 04:11 AM

[dlweld:]

A couple of things on the valuation of EBAY. Seems they have 7 billion for goodwill on the books - seems a bit tenuous, why not 8 billion, or 6 billion, I mean what's a billion here or there? I suppose that all refers to name recognition, and how people feel when they think of EBAy, but out there in the real world, EBAY has unfortunately built up quite a large "badwill" amount. How does that sit on the books? I'd rate goodwill as close to zero now - making the company worth about 4 billion total.

A good example of how following the usual ratios and figures can be misleading. A "walking around" type analysis - what's actually happening on the ground - can't be beat. In Ebay's case there are lots of astute observations from the front, usually from long time sellers who are saddened and disappointed that EBAY has developed to such a point as to be almost unusable by them. With these sellers' departure, many of the cool and expensive items go, the eyeballs go, the advertising revenue goes - and well, the company follows. Sure, there's still lots of cash in the till and lots of (tacky) items for sale but the trend is strongly downward. There's been such a negative branding developed, that even if top management did the right thing - and quit - Ebay will be a long time coming back to what it was. Sad.

Mar 04 12:45 PM

[wut1jc:]

Ebay is a joke. I used to make my living there. Between paypal and ebay fees it has become insane. The feedback has given buyers bith good and bad run of the site. My non payments have gone through the roof due to the fact buyers can no longer receive negative feedback. The DSR's are another joke again letting buyers beat up sellers for anything they feel appropriate. The playing field and Ebay marketplace are no longer balanced. As more sellers leave, many buyers follow. Look for Ioffer or Ebid giving FEEBAY a run for their money very soon.

Mar 05 03:06 PM

[downwithebay:]

Here's an interesting find. 8 SHORT days ago a bunch of the suits at Feebay were awarded a TON of stock for their performance in 2007-2008. ALL the big numbers below are the number of shares each putz received. Pretty stinking sad when shares of Feebay stock have plummeted roughly 60 percent in one year, The company has never paid a dividend, YET Feebay suits get rewarded with MANY 1000s of shares in bonus stock. Absolutely B.S.!

02/27/09 NORRINGTON LORRIE M Exercise 58,334 NA NA
02/27/09 SWAN ROBERT HOLMES Exercise 66,667 NA NA
02/27/09 THOMPSON SCOTT Exercise 8,334 NA NA
02/27/09 AXELROD ELIZABETH LYNN Exercise 46,667 NA NA
02/27/09 DONAHOE JOHN JOSEPH Exercise 127,196 NA NA
02/27/09 JACOBSON MICHAEL RICHARD Exercise 41,667 NA NA

Mar 06 02:10 PM

[ih8aloss:]

Stocks That Appear Ridiculously Cheap
After the disgusting reversal the markets have taken from their highs I've looked else where, stocks starting at the bottom. For the price of one share of the cheapest stock listed above $8.50 I can buy 120 shares of HGUE. It's a penny stock, must be a piece of crap you say, well GM isn't far off and I'll bet HGUE against GM for a winner in the future for best return on your investment!
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I'm not hyping this stock, I'm giving another option for what I believe will be a much better return on your investment. A small interest in the company gets you a lot more shares with a much better return at the price of .07. Remember Dell didn't start out at it's astronomical highs. When was that?

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Apr 22 11:46 PM