While P/E ratios are very simple in nature and never tell the full story about a company, historical P/E ratios can be very useful to tell if a stock is undervalued.
- Intel (INTC): I've written a lot about Intel recently, as its current 4.10% dividend yield adds greatly to the stock's attractiveness. I believe a large reason for Intel's apparent cheap share price is the fact that nearly 60% of its revenues come from the Asia-Pacific region (as per the company's 2010 annual report). The worry is that a slowdown in China's rapid growth is going to really bite into Intel's bottom line. I don't think there is any questioning China's eventual slowing into growth in the 3-5% range, but a slowdown from the current 9-10% growth is still a few years away, and this fact has been baked into the share price for quite some time. To be trading at 50% the P/E ratio it had been trading at for the last five years (20.40) is probably a bit excessive. Additionally, its steady, large yield (which has been growing at a rate of 16% per year) cushions the risk involved in a Chinese (and Indian) slowdown. Intel is also fantastically efficient, especially when compared to its competitors. This efficiency should allow the company to adapt to a slower-growth environment across Asia without damaging bottom lines too much.
- Wal-Mart (WMT): Wal-Mart has a massive presence in the United States, as the largest private employer. WMT stands to do well after the recent oil selloff, as a significant portion of funds usually allocated for gas budgets will be moved to the consumer goods that Wal-Mart sells. Though Wal-Mart's current yield is only 2.9%, the company haw a very reasonable payout ratio of 29%, and as it continues to mature and struggle to find new growth opportunities, more of its earnings will be distributed to shareholders. The company has been growing its yield at a rate of 17% per year, which is far above the rate of other dividend growers. Its 5 year historical P/E ratio is 15, while its trailing P/E is 10.9. Additionally, the company is trading at 10.2 times forward earnings. Wal-Mart's operating cash flow of $24.6 billion also strengthens the balance sheet. With an exceptionally low beta of .37, Wal-Mart tends to outperform during big sell offs and economic downturns.
- Du Pont (DD): Du Pont is a massively diversified company that has blown through its own earnings goals over the last few years. The majority (28%) of DD's revenues are derived from agriculture and nutrition, but the organization is highly profitable in areas such as electronics. Du Pont is highly levered to the need for the global population to be more efficient. DD produces photovoltaics used to make solar panels, and the company makes lightweight materials used in automobiles to improve fuel efficiency. Currently trading at a P/E of 13.5, its 5 year historical P/E is 27. The dividend yield is 3.5%, while its payout ratio is a reasonable 44%. As per the 2010 annual report, after exceeding many goals ahead of schedule, its new goal is for 12% annual compounded earnings growth by 2015. While this seems difficult to attain given an environment where the economy is growing at about 3% a year, Du Pont has shown itself to be absolutely capable of reaching lofty goals. If it fails and only achieves 8-10% annual earnings growth, its share price will still see nice gains, while more earnings will be available for distributions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.