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In recent editions of Lighting Round on his Mad Money program, Jim Cramer was bullish on TransCanada (TRP), Kimberly Clark (KMB) and National Grid (NGG) (among others). These companies appear on my watch list because of their impressive dividend yields. In this article, I will perform detailed fundamental and valuation analysis to determine if it makes sense to follow Cramer's advice and buy these stocks.

The three companies are all large-cap stocks with fairly similar market capitalizations. National Grid, the biggest company of the three has a market cap of $42 billion and currently yields 5.4%. TransCanada, the smaller of the three companies with a market cap of $34 billion, yields 4%. Kimberly Clark is perhaps the most recognizable name in this group with a market cap of $38 billion. The recent stock performance and dividend yield for the three companies is presented below:

Company Basics

TRP

KMB

NGG

Market Cap (Billion)

33.95

37.35

42.37

Debt to Equity Ratio

45%

98%

82%

Stock Performance 5 Yr

15%

56%

-16%

Stock Performance 1 Yr

11%

24%

16%

Dividend Yield

4.0%

3.3%

5.4%

Next, I evaluated the historical growth rates of revenue, income, EPS, book value and the projected growth rates. These are summarized in the table shown below:

Growth Rates

TRP

KMB

NGG

Revenue

10 Year

4%

4%

4%

5 Year

-1%

3%

10%

1 Year

-10%

1%

-4%

Income

10 Year

5%

0%

18%

5 Year

2%

-1%

8%

1 Year

-14%

10%

-6%

EPS

10 Year

0%

3%

16%

5 Year

-4%

2%

2%

1 Year

-15%

11%

-11%

Book Value

10 Year

4%

-2%

2%

5 Year

6%

-2%

5%

1 Year

0%

-1%

6%

Growth Projections

Next Year

12%

7%

4%

Next 5 Year

6%

8%

5%

The revenue growth rates for the three companies are less than stellar. In fact, TRP and NGG reported a negative growth rate last year and KMB was barely positive. A similar trend is seen for TRP and NGG when it comes to net income and EPS. KMB reported healthy gains in net income and EPS, but a declining book value growth rate. Going forward, analysts expect the three companies to grow their earnings at an annual rate between 5% and 8%.

Having analyzed the historic and projected growth rates, I looked at the operational metrics such as gross and operating margins. These are shown below.

Margins

Averages

TRP

KMB

NGG

Gross Margins

10 Year

53%

32%

39%

5 Year

56%

32%

34%

Last Year

69%

32%

26%

TTM

70%

33%

28%

Operating Margins

10 Year

34%

14%

23%

5 Year

33%

13%

23%

Last Year

34%

13%

26%

TTM

34%

13%

28%

TRP has systematically improved its gross margins over the past 10 years while its operating margins are steady. An exact opposite trend can be seen with NGG with declining gross margins and increasing operating margins. KMB has maintained steady margins over the analyzed time period.

Analysis was performed to determine the profitability of the three companies. The metrics selected were return on invested capital and return on assets. As shown in the table below, TRP and KMB have both maintained their ROIC and ROA, while NGG has seen a decline in its ROIC from an average of 11% to 5% (TTM) over the past 10 years. The results are shown below.

Profitability

Averages

TRP

KMB

NGG

ROIC

10 Year

3%

3%

11%

5 Year

3%

4%

8%

Last Year

3%

4%

5%

TTM

3%

4%

5%

ROA

10 Year

16%

10%

16%

5 Year

16%

9%

15%

Last Year

16%

8%

15%

TTM

16%

9%

17%

Having developed a good idea about the fundamentals of the three companies, the next step was to perform relative valuation. The multiples used in the analysis were based on historical analysis of individual company and industry multiples. The table below presents the valuation analysis results.

Valuation

TRP

KMB

NGG

Next Yr Est

$2.52

$6.12

$4.34

EPS Growth Rate

6%

8%

5%

Future EPS (5 Yr)

$3.14

$8.09

$5.05

Expected P/E

18

16

12

Price 5 Yrs Out

$56.49

$129.44

$60.65

Unlevered Beta

0.52

0.64

0.5

D/E Ratio

65%

19%

66%

Current Tax Rate

35%

35%

35%

Levered Beta

0.74

0.72

0.72

Risk Free Rate

2%

2%

2%

Risk Premium

8.00%

8.00%

8.00%

Size Premium

-0.36%

-0.36%

-0.36%

Cost of Equity

7.6%

7.4%

7.4%

Fair Value

$39.23

$90.64

$42.52

Current Price

$44.88

$97.12

$58.23

% Overvalued

13%

7%

27%

As shown in the table above, all the three companies appear overvalued at current levels. NGG especially is significantly overvalued and if not for its good dividend yield, would have made a good short candidate. KMB is modestly overvalued and I would hold my existing position in this company. In my opinion, it would be wise to sell your current position in TRP and NGG and book some profits.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Disclaimer: Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.

Source: Jim Cramer Is Wrong About These 3 Dividend-Paying Stocks