5 Profitable Market Leaders Trading Below Book Value

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 |  Includes: AA, BAC, NBR, NRG, PBR
by: Kevin Quon

As there are several approaches to value in any given situation, the two we are focusing on here is what someone is willing to pay for ownership in a company and what the company's equity is tangibly worth on the basis of its costs. By measuring the differentiation between the two, one can assume that the greater the difference, the more likely it is that one of these measures of value is failing to accurately represent the company fairly. The price-to-book ratio (P/B) is the best method to accomplish this goal. The lower a company's P/B is below 1, the more likely it is that a company has either overvalued its assets or that it's trading at a discount towards an accurate worth of its present condition.

Keeping an eye on the company's books is an important part of any value investor's healthy regimen. After all, what is a high or low share price without a measure to compare it against? When it comes to stocks, one investor's disregarded investment can easily become another's treasured equity with every completed transaction. So it comes as no surprise that share prices often reflect a measurement of sentiment rather than truly being dependent upon the intrinsic value of a company.

Therefore, the following companies compile a potential list of value plays worthy of consideration. By screening companies that have market capitalizations above $1 billion, we can presume there is a greater chance for financial stability, barring the risk of corporate irresponsibility. In the same sense, we can expect that such companies attempt to make it a regular practice to present fair valuations for the assets on their books. However, each company naturally has developed reasons for trading at its current level, which requires further due diligence on the part of the investor. Nevertheless, when a company can theoretically liquidate its assets today at values well above what its share price currently represents, investors can have a greater degree of confidence that a potential value play could be at hand. The following companies are some of the market leaders in their respective industries that are trading at very low P/B ratios.

Name Mkt. Cap. Last Price Book Value/Share P/B Ratio Industry
Alcoa (NYSE:AA) $8.97 Billion $8.39 $12.32 0.68 Aluminum
Bank of America Corp (NYSE:BAC) $132.12 Billion $12.21 $20.24 0.60 Banking
Nabors Industries Ltd. (NYSE:NBR) $4.60 Billion $15.79 $20.47 0.77 Oil & Gas Drilling
NRG Energy, Inc. (NYSE:NRG) $8.65 Billion $26.76 $31.04 0.86 Diversified Utilities
Petroleo Brasileiro S.A. (NYSE:PBR) $105.01 Billion $16.10 $25.83 0.62 Major Oil & Gas
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Some notes considering the aforementioned companies:

  • AA - The ongoing sensitivity of the global economy continues to place pressure upon Industry, and as a result the demand for industrial metals such as aluminum. As one of the largest producers of aluminum, Alcoa continues to remain discounted by investors despite its progress looking forward. Analysts currently expect Alcoa to earn $0.53 in 2013 and have this outlook rising to $0.85 in 2014.
  • BAC - As is the case with nearly all banks, Bank of America remains largely scarred by the Great Recession and the toll that the crisis took on the financial sector. With uncertain regulations expected to tighten the profitability of the banks, the uneasiness that still exists over the global economy's condition, and the susceptibility of the banks to economic volatility, investors are continuing to discount Bank of America's current valuation. Nevertheless, the company continues to earn a profit. Analysts expect Bank of America to earn $0.98 in 2013 and have this rising to $1.31 in 2014.
  • NBR - As a leading land drilling contractor, Nabors has played an active part in the oil & gas boom in America as hydraulic fracturing has opened up previously untapped energy reserves. Yet as a result, the company also felt the crunch in recent years as the supply of natural gas overtook demand. Nevertheless, the company appears to be regaining traction. Analysts expect Nabors to earn $1.16 in 2013 and have this rising to $1.54 in 2014.
  • NRG - As a company specializing in integrated wholesale power generation, NRG Energy operates a large number of power plants that operate across the United States. The company has been a large proponent towards the adoption of green energy having made significant investments in solar and wind farms in recent years. Nevertheless, the company is still largely dependent on fossil fuels, which may face greater regulations in the coming years. However, of these fossil fuel plants, NRG remains highly invested in natural gas power generation facilities, which are often considered to be cleaner burning. The company recently declared its first dividend beginning in 2012, which has helped to propel the share price higher. Analysts currently expect NRG to earn $0.94 in 2013 and the consensus opinion rises to $1.32 in 2014.
  • PBR - The problem with Petrobras may not reside so much in the business as much as it does on the government hand involved. The Brazilian government has capped gasoline prices since 2006 in order to combat inflation. It's also required Petrobras to meet rising demand for forcing the company to import above what it doesn't produce. Despite this, the company continues to remain profitable. In 2013, analysts expect earnings of $2.21 with the consensus rising to $2.40 in 2014.

Disclosure: I am long AA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.