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One very helpful way to analyze the profitability of a company is to use DuPont analysis of return on equity (ROE).

ROE can be broken up into three components such that changes in ROE can be attributed to those components.

ROE
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

Analyzing the sources of returns for a company, we can focus on companies with the following characteristics:

Increasing ROE along with,

• Decreasing leverage, i.e. decreasing Asset / Equity ratio
• Improving asset use efficiency (i.e. increasing Sales / Assets ratio) and improving net profit margin (i.e. increasing Net Income / Sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.



We used DuPont analysis on a universe of stocks carrying low debt, with last year EBITDA (earnings before interest, taxes, depreciation, and amortization) greater than total debt. We then screened for those stocks that are also trading at significant discounts to mean analyst target price, possibly indicating a potentially undervalued opportunity.

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.



Do you think these stocks are undervalued? Use this list as a starting-off point for your own analysis.

List sorted by potential upside implied by target price.

1. Pan American Silver Corp. (NASDAQ:PAAS): Silver Industry. Market cap of $3.58B. Last year EBITDA at $301.46M vs. last year total debt at $0.00M. Target price at $45.99 vs. current price at $33.14 (implies a potential upside of 15.63%). Net margin has increased over the current quarter to 48.38% from 19.35%, and sales/assets has increased over the current quarter to 0.11 from 0.07, while assets/equity has decreased over the current quarter to 1.26 from 1.35. The stock has had a couple of great days, gaining 8.37% over the last week.

2. Lear Corp. (NYSE:LEA): Auto Parts Industry. Market cap of $3.96B. Last year EBITDA at $740.10M vs. last year total debt at $699.00M. Target price at $70.79 vs. current price at $51.13 (implies a potential upside of 15.37%). Net margin has increased over the current quarter to 4.44% from 2.25%, and sales/assets has increased over the current quarter to 0.48 from 0.47, while assets/equity has decreased over the current quarter to 2.77 from 2.92. The stock has gained 48.85% over the last year.

3. Aixtron SE (NASDAQ:AIXG): Diversified Machinery Industry. Market cap of $2.91B. Last year EBITDA at $439.18M vs. last year total debt at $0.00M. Target price at $38.70 vs. current price at $28.41 (implies a potential upside of 13.52%). Net margin has increased over the current quarter to 27.43% from 20.67%, and sales/assets has increased over the current quarter to 0.27 from 0.21, while assets/equity has decreased over the current quarter to 1.37 from 1.39. This is a risky stock that is significantly more volatile than the overall market (beta = 2.68). The stock is a short squeeze candidate, with a short float at 5.09% (equivalent to 17.39 days of average volume). The stock has performed poorly over the last month, losing 19.94%.

4. Atmel Corporation (NASDAQ:ATML): Semiconductor Industry. Market cap of $5.88B. Last year EBITDA at $169.56M vs. last year total debt at $4.06M. Target price at $17.29 vs. current price at $12.86 (implies a potential upside of 12.07%). Net margin has increased over the current quarter to 16.16% from 4.77%, and sales/assets has increased over the current quarter to 0.28 from 0.25, while assets/equity has decreased over the current quarter to 1.56 from 1.82. The stock has gained 149.22% over the last year.

5. Timken Co. (NYSE:TKR): Machine Tools & Accessories Industry. Market cap of $4.77B. Last year EBITDA at $637.30M vs. last year total debt at $513.70M. Target price at $64.86 vs. current price at $48.70 (implies a potential upside of 10.98%). Net margin has increased over the current quarter to 8.99% from 3.13%, and sales/assets has increased over the current quarter to 0.30 from 0.23, while assets/equity has decreased over the current quarter to 2.04 from 2.48. The stock has gained 74.74% over the last year.

6. Vistaprint N.V. (VPRT):
Business Services Industry. Market cap of $1.97B. Last year EBITDA at $121.22M vs. last year total debt at $5.22M. Target price at $60.00 vs. current price at $45.74 (implies a potential upside of 9.31%). Net margin has increased over the current quarter to 11.25% from 9.74%, and sales/assets has increased over the current quarter to 0.38 from 0.36, while assets/equity has decreased over the current quarter to 1.25 from 1.27. The stock is a short squeeze candidate, with a short float at 10.56% (equivalent to 9.5 days of average volume). The stock has lost 7.86% over the last year.

7. Veeco Instruments Inc. (NASDAQ:VECO):
Semiconductor Equipment & Materials Industry. Market cap of $1.69B. Last year EBITDA at $290.45M vs. last year total debt at $104.02M. Target price at $54.13 vs. current price at $41.59 (implies a potential upside of 8.45%). Net margin has increased over the current quarter to 20.67% from 19.32%, and sales/assets has increased over the current quarter to 0.22 from 0.20, while assets/equity has decreased over the current quarter to 1.41 from 1.65. This is a risky stock that is significantly more volatile than the overall market (beta = 2.48). The stock is a short squeeze candidate, with a short float at 25.78% (equivalent to 7.47 days of average volume). The stock has performed poorly over the last month, losing 17.28%.

8. Cummins Inc. (NYSE:CMI): Diversified Machinery Industry. Market cap of $20.92B. Last year EBITDA at $1.58B vs. last year total debt at $791.00M. Target price at $133.83 vs. current price at $106.58 (implies a potential upside of 4.64%). Net margin has increased over the current quarter to 8.89% from 6.01%, and sales/assets has increased over the current quarter to 0.36 from 0.28, while assets/equity has decreased over the current quarter to 2.20 from 2.31. The stock has had a good month, gaining 13.84%.

9. Autoliv, Inc. (NYSE:ALV): Auto Parts Industry. Market cap of $6.15B. Last year EBITDA at $1.14B vs. last year total debt at $724.80M. Target price at $86.70 vs. current price at $69.32 (implies a potential upside of 4.23%). Net margin has increased over the current quarter to 8.61% from 7.35%, and sales/assets has increased over the current quarter to 0.35 from 0.33, while assets/equity has decreased over the current quarter to 1.95 from 2.11. The stock has gained 37.95% over the last year.

*Accounting data sourced from Google Finance; debt, EBITDA, and price data sourced from Screener.co; all other data sourced from Finviz.


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

Source: 9 Low-Debt, Undervalued Companies With Strong Sources of Profitability