17 Stocks with Falling P/E, Rising EPS, and Strong Sources of Profitability

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Includes: ABEV, BGS, BRLI, CHS, CTCM, IXYS, KLAC, KMT, KMX, LFL, MMC, OUTR, OVTI, PAAS, PUK, WDR, ZBRA
by: Kapitall

When a company's P/E ratio has fallen over time, while earnings steadily rise, it is a sign that price has not proportionately increased with earnings.

In other words, the earnings may not be fully priced into the stock, and the stock may be undervalued.

We ran a screen on companies exhibiting these trends, but we also wanted to look at sources of profitability. One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability.

ROE can be broken up into three components such that increases 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.

To illustrate this analysis, we ran DuPont on stocks seeing a falling P/E ratio (comparing the trailing-twelve-month ratio to the 3-year average) and rising EPS over the same time period.

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 being undervalued? Use this list as a starting-off point for your own analysis.

List sorted by market cap.

1. Companhia de Bebidas Das Americas (AMBEV) (ABV): Beverages Industry. Market cap of $97.58B. TTM P/E at 18.84 vs. 3-year average at 33.94. Last year diluted EPS at $1.51 vs. 2-year prior EPS at $1.03. MRQ net profit margin has increased to 31.83% from 26.96% one year ago, MRQ Sales/Assets has increased to 0.16 from 0.15, and MRQ Assets/Equity has decreased to 1.73 from 1.78. The stock has had a couple of great days, gaining 5.49% over the last week.

2. Prudential plc (NYSE:PUK): Life Insurance Industry. Market cap of $26.10B. TTM P/E at 8.66 vs. 3-year average at 19.36. Last year diluted EPS at $0.92 vs. 2-year prior EPS at -$0.26. MRQ net profit margin has increased to 3.99% from -1.85% one year ago, MRQ Sales/Assets has increased to 0.08 from 0.07, and MRQ Assets/Equity has decreased to 31.70 from 42.24. The stock has gained 23.29% over the last year.

3. Marsh & McLennan Companies, Inc. (NYSE:MMC): Insurance Brokers Industry. Market cap of $15.18B. TTM P/E at 17.20 vs. 3-year average at 32.25. Last year diluted EPS at $1.00 vs. 2-year prior EPS at -$0.13. MRQ net profit margin has increased to 9.63% from 9.06% one year ago, MRQ Sales/Assets has increased to 0.19 from 0.17, and MRQ Assets/Equity has decreased to 2.30 from 2.60. The stock has gained 22.95% over the last year.

4. CarMax Inc. (NYSE:KMX): Auto Dealerships Industry. Market cap of $6.34B. TTM P/E at 15.79 vs. 3-year average at 19.37. Last year diluted EPS at $1.67 vs. 2-year prior EPS at $0.25. MRQ net profit margin has increased to 4.71% from 4.47% one year ago, MRQ Sales/Assets has increased to 0.37 from 0.35, and MRQ Assets/Equity has decreased to 2.95 from 3.25. The stock has performed poorly over the last month, losing 13.77%.

5. KLA-Tencor Corporation (NASDAQ:KLAC): Semiconductor Equipment & Materials Industry. Market cap of $6.0B. TTM P/E at 7.71 vs. 3-year average at 62.05. Last year diluted EPS at $4.66 vs. 2-year prior EPS at -$3.07. MRQ net profit margin has increased to 27.46% from 20.21% one year ago, MRQ Sales/Assets has increased to 0.19 from 0.14, and MRQ Assets/Equity has decreased to 1.63 from 1.74. The stock has performed poorly over the last month, losing 10.95%.

6. Pan American Silver Corp. (NASDAQ:PAAS): Silver Industry. Market cap of $3.15B. TTM P/E at 15.68 vs. 3-year average at 44.02. Last year diluted EPS at $1.27 vs. 2-year prior EPS at $0.28. MRQ net profit margin has increased to 48.38% from 19.35% one year ago, MRQ Sales/Assets has increased to 0.11 from 0.07, and MRQ Assets/Equity has decreased to 1.26 from 1.35. The stock has performed poorly over the last month, losing 11.31%.

7. TAM S.A. (NYSE:TAM): Major Airlines Industry. Market cap of $2.85B. TTM P/E at 5.33 vs. 3-year average at 39.89. Last year diluted EPS at $2.67 vs. 2-year prior EPS at -$6.05. MRQ net profit margin has increased to 4.23% from -2.72% one year ago, MRQ Sales/Assets has increased to 0.21 from 0.20, and MRQ Assets/Equity has decreased to 5.69 from 13.96. The stock has had a couple of great days, gaining 8.37% over the last week. The stock has performed poorly over the last month, losing 20.89%.

8. Kennametal Inc. (NYSE:KMT): Machine Tools & Accessories Industry. Market cap of $2.84B. TTM P/E at 12.65 vs. 3-year average at 58.23. Last year diluted EPS at $2.76 vs. 2-year prior EPS at -$1.40. MRQ net profit margin has increased to 12.49% from 7.53% one year ago, MRQ Sales/Assets has increased to 0.25 from 0.24, and MRQ Assets/Equity has decreased to 1.68 from 1.72. The stock has performed poorly over the last month, losing 17.72%.

9. Waddell & Reed Financial Inc. (NYSE:WDR): Asset Management Industry. Market cap of $2.67B. TTM P/E at 14.60 vs. 3-year average at 19.88. Last year diluted EPS at $1.83 vs. 2-year prior EPS at $1.12. MRQ net profit margin has increased to 16.12% from 13.28% one year ago, MRQ Sales/Assets has increased to 0.30 from 0.30, and MRQ Assets/Equity has decreased to 2.03 from 2.31. The stock has performed poorly over the last month, losing 16.75%.

10. CTC Media, Inc (NASDAQ:CTCM): Broadcasting Industry. Market cap of $2.62B. TTM P/E at 16.26 vs. 3-year average at 29.77. Last year diluted EPS at $0.93 vs. 2-year prior EPS at $0.14. MRQ net profit margin has increased to 18.81% from 16.02% one year ago, MRQ Sales/Assets has increased to 0.19 from 0.15, and MRQ Assets/Equity has decreased to 1.21 from 1.22. This is a risky stock that is significantly more volatile than the overall market (beta = 2.28). It's been a rough couple of days for the stock, losing 6.1% over the last week.

11. Chico's FAS Inc. (NYSE:CHS): Apparel Stores Industry. Market cap of $2.36B. TTM P/E at 19.09 vs. 3-year average at 34.28. Last year diluted EPS at $0.64 vs. 2-year prior EPS at -$0.11. MRQ net profit margin has increased to 8.55% from 7.35% one year ago, MRQ Sales/Assets has increased to 0.37 from 0.35, and MRQ Assets/Equity has decreased to 1.37 from 1.38. The stock has performed poorly over the last month, losing 15.23%.

12. Zebra Technologies Corp. (NASDAQ:ZBRA): Computer Peripherals Industry. Market cap of $1.85B. TTM P/E at 15.97 vs. 3-year average at 43.39. Last year diluted EPS at $1.77 vs. 2-year prior EPS at -$0.60. MRQ net profit margin has increased to 13.42% from 10.38% one year ago, MRQ Sales/Assets has increased to 0.28 from 0.26, and MRQ Assets/Equity has decreased to 1.15 from 1.17. The stock has performed poorly over the last month, losing 17.44%.

13. OmniVision Technologies Inc. (NASDAQ:OVTI): Semiconductor Circuits Industry. Market cap of $1.50B. TTM P/E at 12.20 vs. 3-year average at 50.95. Last year diluted EPS at $2.11 vs. 2-year prior EPS at -$0.74. MRQ net profit margin has increased to 13.15% from 2.26% one year ago, MRQ Sales/Assets has increased to 0.25 from 0.20, and MRQ Assets/Equity has decreased to 1.38 from 1.49. The stock has had a couple of great days, gaining 10.04% over the last week. The stock has performed poorly over the last month, losing 18.31%.

14. Coinstar Inc. (NASDAQ:CSTR): Specialty Retail Industry. Market cap of $1.30B. TTM P/E at 15.21 vs. 3-year average at 28.87. Last year diluted EPS at $2.03 vs. 2-year prior EPS at $0.50. MRQ net profit margin has increased to 6.14% from 3.91% one year ago, MRQ Sales/Assets has increased to 0.37 from 0.26, and MRQ Assets/Equity has decreased to 2.58 from 2.73. Might be undervalued at current levels, with a PEG ratio at 0.82, and P/FCF ratio at 8. The stock is a short squeeze candidate, with a short float at 34.27% (equivalent to 9.52 days of average volume). The stock has performed poorly over the last month, losing 27.22%.

15. B&G Foods Inc. (NYSE:BGS): Processed & Packaged Goods Industry. Market cap of $836.20M. TTM P/E at 17.16 vs. 3-year average at 21.54. Last year diluted EPS at $0.67 vs. 2-year prior EPS at $0.27. MRQ net profit margin has increased to 9.73% from 7.01% one year ago, MRQ Sales/Assets has increased to 0.15 from 0.14, and MRQ Assets/Equity has decreased to 3.71 from 3.92. The stock is a short squeeze candidate, with a short float at 5.88% (equivalent to 5.46 days of average volume). The stock has performed poorly over the last month, losing 14.21%.

16. Bio-Reference Laboratories Inc. (NASDAQ:BRLI): Medical Laboratories & Research Industry. Market cap of $516.52M. TTM P/E at 16.02 vs. 3-year average at 22.56. Last year diluted EPS at $0.94 vs. 2-year prior EPS at $0.56. MRQ net profit margin has increased to 5.68% from 5.24% one year ago, MRQ Sales/Assets has increased to 0.51 from 0.50, and MRQ Assets/Equity has decreased to 1.59 from 1.64. The stock is a short squeeze candidate, with a short float at 28.98% (equivalent to 27.31 days of average volume). The stock has lost 4.89% over the last year.

17. IXYS Corp. (NASDAQ:IXYS): Semiconductor Industry. Market cap of $390.59M. TTM P/E at 9.98 vs. 3-year average at 33.12. Last year diluted EPS at $1.14 vs. 2-year prior EPS at -$0.11. MRQ net profit margin has increased to 9.81% from 7.69% one year ago, MRQ Sales/Assets has increased to 0.30 from 0.30, and MRQ Assets/Equity has decreased to 1.40 from 1.55. It's been a rough couple of days for the stock, losing 8.9% over the last week.

*P/E and EPS data sourced from Screener.co, accounting ratios sourced from Google Finance, 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.