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Investors, the usual suspects being value investors, use specific valuation metrics in their search for financially sound companies selling at cheap prices. Price to book value and price to cash flow are two of the most widely used.

The current market conditions give level headed investors a great buying opportunity.

Global Payments (GPN) common stock currently trades at a price earnings ratio of 15.9, slightly above its 10 year median of 15. The price to book ratio is 2.92. Its price to cash flow ratio sits at 10.7.

Global Payments operates in a financial services industry which is widely diversified and multifaceted along product and service offerings. This makes it tricky for direct comparisons. MasterCard (MA) and Visa (V) are the best candidates for peer analysis.

So, how does Global Payments valuation compare to its industry peers? Very well indeed, as the table below illustrates:

Company

Current P/E

Industry Average P/E

Historical P/E

Price to Book Value

Price to Cash Flow

Global Payments

15.9

21.8

15

2.92

10.7

Master Card

18.1

21.8

19

6.79

16.3

Visa

18.6

21.8

25

2.48

16.9

This company is the leader in the U.S. with respect to credit and debit card volumes. 45% of total revenues come from outside the U.S. This division has been performing well recently. On the financial position front, Global Payments debt to equity ratio is 0.53, well below the industry average of 1.33.

An undervalued, financially sound company with good growth prospects home and abroad, this stock is a sound choice.

Advance Auto Parts (AAP) is the second largest parts retailer in the U.S. The common stock currently trades at a price to earnings ratio sits at 12.5, below its historical average of 16 and industry average of 15.7.

Typical of Wall Street short term thinking, the madding crowd fled this stock in May, due to weak first quarter 2011 comparable store sales gain of 1.4% versus an 8.9% gain during December 2010. Price to book ratio is 4.57 whilst price to cash flow sits at 7.70, well below the industry average of 11.2.

So, how does Advance Auto Parts compare to its peers AutoZone (AZO) and O’Reilly Automotive (ORLY)? Quite well actually, as the table below shows.

Company

Current P/E

Industry Average P/E

Historical P/E

Price to Book Value

Price to Cash Flow

Advanced Auto Parts

12.5

15.7

16

4.57

7.7

AutoZone

15.5

15.7

12

11.5

O Reilly Automotive

18.5

15.7

23

2.69

13.1

Whilst the parts retailing environment might be slowing down, Advance Auto is still in expansion mode. It will be expanding its new do-it-for-me stores which target commercial customers such as repair centers. With current economic conditions, consumer’s credit ability is limited to buy new cars, meaning higher mileages on older cars.

Investors with a long term view will find this company attractive at its current price.

Life Point Hospitals (LPNT) operates general acute care hospitals in growing, non urban areas in the US. It looks to acquire hospitals where it will be the sole provider to the community.

On the earnings front, it had a good first quarter, beating analyst estimates. The common stock currently trades at a price to earnings ratio of 10.1, well below its 10 year historical average of 13.5. Its price to book ratio stands at 0.82 with price to cash flow being 5.1.

On the valuation front, Life Point compares favorably with its peers:

Company

Current P/E

Industry Average P/E

Historical P/E

Price to Book Value

Price to Cash Flow

Life Point Hospitals

10.1

5.2

13.5

0.82

5.1

Community Health Systems (CYH)

6.1

5.2

12

0.76

1.8

Tenet HealthCare (THC)

2.4

5.2

15

1.55

1.7

Health Management Associates (HMA)

10.0

5.2

15

2.77

4

Universal Health Services (UHS)

12.2

5.2

15

1.71

6

The rising ageing population bodes well for Life Point’s future revenue. A concern though is the composition of its revenue stream. 42% of revenue comes from Medicare and Medicaid, which can be unpredictable. However, recent new state programs with better pricing were one of factors responsible for Life Point’s increased earnings.

Several factors need consideration before committing funds: the current low valuation with an increased earnings trend is a positive versus the unpredictable funding from federal and state programs.

General Dynamics (GD) operates in the aerospace/defense industry, is the fifth largest military contractor and one of the world’s largest makers of corporate jets. Its Gulfstream jet is one of the world’s most popular corporate aircraft.

The common stock currently trades at price to earnings ratio of 8.9, well below industry average of 13.1 and its historical average of 13. Price to book ratio is 1.62 while price to cash flow ratio is 7.

Compared against its peers, General Dynamics compares favorably:

Company

Current P/E

Industry Average P/E

Historical P/E

Price to Book Value

Price to Cash Flow

General Dynamics

8.9

13.1

13

1.62

7

BE Aerospace (OTCPK:BAESF)

18.9

13.1

15.5

1.93

14.5

Bombardier Inc (OTCQX:BDRBF)

12.8

13.1

14

6.65

8

Boeing (BA)

13.2

13.1

15

9.75

8.9

Lockheed Martin (LMT)

9.4

13.1

11

7.24

6.8

Textron Inc (TXT)

20.1

13.9

15

1.52

9

Long term prospects look promising. A current order backlog of $18 billion on its Gulfstream jets will support full production for a good few years. It has numerous military contracts which run to 2014 and 2016 as well.

With the above in mind, investors should note that cuts in military spending will affect profitability. There is a good chance of this happening due to budget deficit pressures and an increase in entitlement spending.

United Health Group (UNH) provides health care benefits to over 32 million people in the US. In 2010, UNH was ranked second in enrollments.

The first two quarters for 2011 was strong with second quarter earnings beating analyst estimates. This was mainly due to increased enrollment and premium hikes.

From a valuation perspective, the common stock currently trades at a price to earnings ratio of 10, below is historical average of 13.5. Price to book value is 1.75, and price to cash flow is 8.

Against its peers, it compares favorably:

Company

Current P/E

Industry Average P/E

Historical P/E

Price to Book Value

Price to Cash Flow

United Health Group

10

10.8

13.5

1.75

8

Health Net Inc. (HNT)

23.5

10.8

10

1.35

15.3

Aetna Inc (AET)

8

10.8

13.5

1.32

6

Health Management Associates (HMA)

10

5.2

15

2.77

4

Universal Health Services

12.2

5.2

15

1.71

6

Going forward, health care reforms will impose restrictions on certain aspects of their operations. This can put margins under pressure.

For the short term, this stock is a good bet. It’s undervalued on a historic basis and its earnings momentum is trending upwards. The stock price should follow suit.

Parker Hannifin (PH) operates in a broadly diversified engineering industry with peers such as General Electric (GE) and 3M Company (MMM). Its products serve aerospace, commercial, mobile and industrial markets.

The 2011 fiscal year was stellar for Parker. An all time record of $12.3 billion in sales was reached, a 23.5% increase. Net income increased a whopping 90%.

The common stock currently trades at a price to earnings ratio of 10.5, below the industry average of 14.8 and historical average of 14. Price to book ratio is 2.02 with price to cash flow being 7.3.

Making comparisons in a broadly diversified industry is difficult, since products and service offerings vary greatly between businesses. Therefore, the peer company’s business lines and products were used as the main selection criteria for peer analysis.

Company

Current P/E

Industry Average P/E

Historical P/E

Price to Book Value

Price to Cash Flow

Parker Hannifin (PH)

10.5

14.8

14

2.02

7.3

Tyco International (TYC)

13.4

13.4

16

1.31

6.7

SPX Corporation (SPW)

17.7

13.9

15

1.55

1.7

This company is in great financial shape, its earnings are clearly on an upward trend and future prospects look bright. The current market conditions are a blessing in disguise.

A buying opportunity like this doesn’t come very often.

Source: 5 Cheap Stocks to Buy Now for Big Profits in 2012