Notwithstanding the recent turmoil, stocks have been in a bull run for nearly two years. We looked at six stocks that appear undervalued today. Consider buying shares of these companies for profits in 2012.
Aegon N.V. (AEG): Shares of this life insurance company are trading at $4.25 at the time of writing, and at the low end of their 52-week trading range of $4.18 to $8.07. At the current market price, the company is capitalized at $7.50 billion. Earnings per share for the last fiscal year were $0.69, placing the shares on a price-to-earnings ratio of 6.13.
These earnings are expected to rise through the next couple of years, hitting $0.73 this year, and then rising to $0.89 the following year. AEG received Dutch government aid in the 2008 financial crisis, and has been selling operations to repay its debts. The latest sale, Guardian Life in the U.K. for $451 million, takes it a step closer to achieving this goal. It will continue to manage Guardian’s assets of £7.5 billion (approximately $11 billion).
Well on the way to achieving its target of full repayment to the Dutch government, and continuing to shed non core assets, for Aegon it is deals like the Guardian one that will push it to a better-managed profit stream. When the company has fully repaid its debts, it is likely to reinstate dividend payments. This will help the stock price near and long term.
DRDGold Limited (DROOY): With mining assets in South Africa, the company runs operations from exploration through to smelting.
Shares are trading at $4.23 at the time of writing, toward the bottom end of their 52-week trading range of $3.96 to $6.23. At the current market price, the company is capitalized at $162.80 million. Earnings per share for the last fiscal year were $1.21, placing the shares on a price to earnings ratio of 3.49. It paid a dividend of $0.06 last year (a yield of 1.40%) which was covered over 20 times by its earnings.
It has the lowest price-to-earnings ratio of the gold mining stocks, though its share price is being held back by recent employee unrest in the region. There is room for the company to increase its well-covered dividend, and that should be attractive to income investors. With gold prices increasing, and production costs likely to remain stable, DRDGold could be a stock worth investing in for the gearing that the safe haven value of its gold reserves offers to its potential earnings.
Cloud Peak Energy Limited (CLD): The third-largest coal producer in the United States, the company has approximately 970 million tons of proven and probable reserves. It supplies its product to electricity utilities.
Shares are trading at $20.06 at the time of writing, compared to their 52-week trading range of $14.77 to $24.69. At the current market price, the company is capitalized at $1.07 billion. Earnings per share for the last fiscal year were $2.07, placing the shares on a PE ratio of 9.69. It paid no dividend last year.
These earnings are expected to dip through the next couple of years, retreating to $1.79 this year, before rising to $2.11 the following year as economic constraints take hold, and the search for cleaner energy continues.
When compared to its sector, its price-to-earnings ratio is one of the lowest, and below the average of 12.42. Though the third largest of the coal production companies in the United States, it is far smaller than its main competitors, Arch (ACI) and Peabody (BTU). This could give it the agility it will need to succeed in the coming years. Its operating margin of 16.07% is better than Arch, and this is an indicator of a management that has the company cost structure under control. Expect the shares to outperform those of its major rivals through the next 24 months.
USG Corporation (USG): USG is a worldwide producer of building materials, primarily gypsum wallboard, which is used for repair and construction.
Shares are trading at $8.17 at the time of writing, at the lower end of their 52-week trading range of $7.88 to $19.91. At the current market price, the company is capitalized at $860.22 million. Earnings per share for the last fiscal year were -$3.87, and it paid no dividend.
These earnings are expected to remain negative through the next couple of years, though the loss per share is expected to reduce to $1.60 in 2012. Revenue during this time is forecast to increase to around $3.25 billion.
The story with USG is all about its debt. With $2.31 billion of debt under its belt, it has very little room to maneuver. With a patchy economy going forward, the company may find it hard to cut its loss per share by the amount that it needs to. Consequently, it may struggle to return to profitability. Given its debt, the book value of the shares is $5.01. Action looks to be time critical now. With S&P (MHP) recently cutting USG’s credit rating, it may soon be time for the company to go to the market to raise cash.
If the company can address its burgeoning debt, then it may look attractive. Until then, avoid.
Ford Motor Company (F): Ford has turned around under CEO Alan Mulally, but the share price does not yet fully reflect it. Shares are trading at $9.93 at the time of writing, at the bottom of their 52-week trading range of $9.87 to $18.97. At the current market price, the company is capitalized at $37.72 billion. Earnings per share for the last fiscal year were $1.77, placing the shares on a price to earnings ratio of 5.61.
These earnings are expected to rise through the next couple of years, hitting $1.97 this year, and then rising to $2.00 the following year, as revenues increase to $139.3 billion.
Its key financial ratios of gross and operating margins, EBITDA, and operating cash flow are all in line with its competitors.
Ford holds cash of approximately $21.76 billion, a good cushion against its debt position of $98.55 billion. The company was hit by the financial crisis of 2008, when bad payers put its debt position in a tailspin. It still derives most of its profits from its financial arm. However, in this regard it is not much different to its competitors. With a global brand and a large cash cushion, the company is well placed to weather further economic malaise and to profit from any upswing. Wise financial decisions by management could see the share price improve toward its 52-week high.
Bank of America (BAC): America's big bank operates on a global basis, and now employs around 290,000 employees.
Shares are trading at $6.51 at the time of writing, at the bottom of their 52-week trading range of $6.31 to $15.31. At the current market price, the company is capitalized at $65.97 billion. Earnings per share for the last fiscal year were -$1.64, though it did pay a dividend of $0.04 last year (a yield of 0.50%).
These earnings are expected to turn strongly positive in the next couple of years as the lingering problems from the 2008 financial crisis are finally worked through, Earnings per share should reach $1.53 in fiscal 2012, and this could pull the dividend higher also.
Revenue growth should also be strong, rising some 20% to $107 billion during this time.
Chief Executive Brian Moynihan has been working hard to relieve the company of its mortgage liabilities, and this process, while painful, could be coming to a close. The cost of doing this has been a weigh on the shares all year. Once this has been completed, expect the share to react very positively as the unknown quantity and risk is taken away from the shares.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.