19 Cheap Stocks With Low Debt and Strong Profitability

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Includes: AEM, AGCO, AIG, AON, BSX, CLR, MRO, MSM, PH, PII, RAX, ROK, SWN, TIF, TMK, TSU, TYC, UTX, WSM
by: Kapitall

A company’s profitability can come from more than one source, and some are preferred over others. This is why an analysis beyond the top- and bottom-line numbers is important when choosing stocks.

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.

To illustrate this analysis, we ran DuPont on low-debt companies trading at significant discounts to their target price.

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 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 companies have strong profitability? Use this list as a starting-off point for your own analysis.

List sorted by potential upside implied by target price.

1. Marathon Oil Corporation (NYSE:MRO): Oil & Gas Refining & Marketing Industry. Market cap of $19.36B. Target price at $37.68 vs. current price at $27.11 (implies a potential upside of 39.0%). MRQ total debt to assets at 0.16. MRQ net profit margin has increased to 25.77% from 24.42% one year ago, MRQ Sales/Assets has increased to 0.13 from 0.06, and MRQ Assets/Equity has decreased to 1.82 from 2.08. The stock has had a couple of great days, gaining 7.03% over the last week. The stock has performed poorly over the last month, losing 13.16%.

2. AGCO Corporation (NYSE:AGCO): Farm & Construction Machinery Industry. Market cap of $3.91B. Target price at $55.12 vs. current price at $40.51 (implies a potential upside of 36.07%). MRQ total debt to assets at 0.12. MRQ net profit margin has increased to 5.67% from 3.61% one year ago, MRQ Sales/Assets has increased to 0.38 from 0.35, and MRQ Assets/Equity has decreased to 2.03 from 2.15. The stock has performed poorly over the last month, losing 14.08%.

3. Polaris Industries, Inc. (NYSE:PII): Recreational Vehicles Industry. Market cap of $3.56B. Target price at $139.11 vs. current price at $103.06 (implies a potential upside of 34.98%). MRQ total debt to assets at 0.09. MRQ net profit margin has increased to 8.02% from 5.95% one year ago, MRQ Sales/Assets has increased to 0.56 from 0.52, and MRQ Assets/Equity has decreased to 2.42 from 3.42. After a solid performance over the last year, PII has pulled back during recent sessions. The stock has had a couple of great days, gaining 6.99% over the last week.

4. MSC Industrial Direct Co. Inc. (NYSE:MSM): Industrial Equipment Wholesale Industry. Market cap of $3.77B. Target price at $79.57 vs. current price at $58.98 (implies a potential upside of 34.91%). MRQ total debt to assets at 0.00. MRQ net profit margin has increased to 11.66% from 9.83% one year ago, MRQ Sales/Assets has increased to 0.43 from 0.39, and MRQ Assets/Equity has decreased to 1.22 from 1.28. The stock has had a couple of great days, gaining 8.16% over the last week.

5. Williams-Sonoma Inc. (NYSE:WSM): Home Furnishing Stores Industry. Market cap of $3.25B. Target price at $41.68 vs. current price at $31.06 (implies a potential upside of 34.18%). MRQ total debt to assets at 0.00. MRQ net profit margin has increased to 4.10% from 2.72% one year ago, MRQ Sales/Assets has increased to 0.39 from 0.36, and MRQ Assets/Equity has decreased to 1.6 from 1.62. The stock has performed poorly over the last month, losing 17.39%.

6. Rockwell Automation Inc. (NYSE:ROK): Industrial Electrical Equipment Industry. Market cap of $9.02B. Target price at $84.50 vs. current price at $63.01 (implies a potential upside of 34.11%). MRQ total debt to assets at 0.17. MRQ net profit margin has increased to 11.84% from 9.42% one year ago, MRQ Sales/Assets has increased to 0.28 from 0.27, and MRQ Assets/Equity has decreased to 2.81 from 3.35. The stock has performed poorly over the last month, losing 21.85%.

7. United Technologies Corp. (NYSE:UTX): Conglomerates Industry. Market cap of $65.93B. Target price at $96.83 vs. current price at $72.55 (implies a potential upside of 33.47%). MRQ total debt to assets at 0.18. MRQ net profit margin has increased to 8.74% from 8.04% one year ago, MRQ Sales/Assets has increased to 0.24 from 0.24, and MRQ Assets/Equity has decreased to 2.73 from 2.93. The stock has performed poorly over the last month, losing 17.2%.

8. Continental Resources Inc. (NYSE:CLR): Oil & Gas Drilling & Exploration Industry. Market cap of $10.55B. Target price at $75.68 vs. current price at $58.45 (implies a potential upside of 29.49%). MRQ total debt to assets at 0.19. MRQ net profit margin has increased to 39.67% from 36.34% one year ago, MRQ Sales/Assets has increased to 0.13 from 0.1, and MRQ Assets/Equity has decreased to 2.35 from 2.39. The stock has had a couple of great days, gaining 11.42% over the last week. The stock has performed poorly over the last month, losing 14.2%.

9. Tyco International Ltd. (NYSE:TYC): Diversified Machinery Industry. Market cap of $19.21B. Target price at $52.87 vs. current price at $41.36 (implies a potential upside of 27.82%). MRQ total debt to assets at 0.16. MRQ net profit margin has increased to 8.36% from 5.94% one year ago, MRQ Sales/Assets has increased to 0.16 from 0.16, and MRQ Assets/Equity has decreased to 1.9 from 1.9. The stock has performed poorly over the last month, losing 11.23%.

10. Aon Corporation (NYSE:AON): Insurance Brokers Industry. Market cap of $15.04B. Target price at $58.75 vs. current price at $46.04 (implies a potential upside of 27.61%). MRQ total debt to assets at 0.15. MRQ net profit margin has increased to 9.18% from 8.06% one year ago, MRQ Sales/Assets has increased to 0.09 from 0.08, and MRQ Assets/Equity has decreased to 3.63 from 4.41. The stock has gained 24.2% over the last year.

11. American International Group, Inc. (NYSE:AIG): Property & Casualty Insurance Industry. Market cap of $46.52B. Target price at $31.15 vs. current price at $24.51 (implies a potential upside of 27.09%). MRQ total debt to assets at 0.13. MRQ net profit margin has increased to 11.03% from -14.50% one year ago, MRQ Sales/Assets has increased to 0.03 from 0.02, and MRQ Assets/Equity has decreased to 6.66 from 11.27. The stock has performed poorly over the last month, losing 11.36%.

12. Parker Hannifin Corporation (NYSE:PH): Industrial Equipment & Components Industry. Market cap of $11.35B. Target price at $88.92 vs. current price at $69.97 (implies a potential upside of 27.08%). MRQ total debt to assets at 0.16. MRQ net profit margin has increased to 8.57% from 7.97% one year ago, MRQ Sales/Assets has increased to 0.31 from 0.28, and MRQ Assets/Equity has decreased to 2.02 from 2.27. The stock has performed poorly over the last month, losing 18.54%.

13. Southwestern Energy Co. (NYSE:SWN): Independent Oil & Gas Industry. Market cap of $13.47B. Target price at $49.18 vs. current price at $38.71 (implies a potential upside of 27.03%). MRQ total debt to assets at 0.18. MRQ net profit margin has increased to 21.88% from 20.69% one year ago, MRQ Sales/Assets has increased to 0.11 from 0.11, and MRQ Assets/Equity has decreased to 2.04 from 2.1. The stock has had a couple of great days, gaining 6.23% over the last week. The stock has performed poorly over the last month, losing 17.71%.

14. Torchmark Corp. (NYSE:TMK): Life Insurance Industry. Market cap of $3.80B. Target price at $45.56 vs. current price at $36.16 (implies a potential upside of 25.98%). MRQ total debt to assets at 0.06. MRQ net profit margin has increased to 16.98% from 15.08% one year ago, MRQ Sales/Assets has increased to 0.05 from 0.05, and MRQ Assets/Equity has decreased to 4.29 from 4.3. Might be undervalued at current levels, with a PEG ratio at 0.88, and P/FCF ratio at 4.01. The stock has performed poorly over the last month, losing 11.59%.

15. Agnico-Eagle Mines Ltd. (NYSE:AEM): Gold Industry. Market cap of $10.77B. Target price at $79.87 vs. current price at $63.67 (implies a potential upside of 25.44%). MRQ total debt to assets at 0.11. MRQ net profit margin has increased to 10.98% from 9.40% one year ago, MRQ Sales/Assets has increased to 0.07 from 0.06, and MRQ Assets/Equity has decreased to 1.48 from 1.54. The stock has had a couple of great days, gaining 5.22% over the last week.

16. Tiffany & Co. (NYSE:TIF): Jewelry Stores Industry. Market cap of $8.39B. Target price at $82.27 vs. current price at $65.66 (implies a potential upside of 25.29%). MRQ total debt to assets at 0.18. MRQ net profit margin has increased to 10.65% from 10.17% one year ago, MRQ Sales/Assets has increased to 0.2 from 0.19, and MRQ Assets/Equity has decreased to 1.65 from 1.75. The stock has performed poorly over the last month, losing 19.13%.

17. Boston Scientific Corporation (NYSE:BSX): Medical Instruments & Supplies Industry. Market cap of $9.81B. Target price at $7.92 vs. current price at $6.41 (implies a potential upside of 23.61%). MRQ total debt to assets at 0.19. MRQ net profit margin has increased to 7.39% from 5.08% one year ago, MRQ Sales/Assets has increased to 0.09 from 0.08, and MRQ Assets/Equity has decreased to 1.87 from 2.11. The stock has gained 10.52% over the last year.

18. Rackspace Hosting, Inc (NYSE:RAX): Internet Software & Services Industry. Market cap of $4.66B. Target price at $44.53 vs. current price at $36.07 (implies a potential upside of 23.46%). MRQ total debt to assets at 0.16. MRQ net profit margin has increased to 7.10% from 5.98% one year ago, MRQ Sales/Assets has increased to 0.28 from 0.26, and MRQ Assets/Equity has decreased to 1.73 from 1.81. The stock has performed poorly over the last month, losing 15.01%.

19. TIM Participacoes S.A. (NYSE:TSU): Wireless Communications Industry. Market cap of $6.95B. Target price at $33.69 vs. current price at $27.99 (implies a potential upside of 20.37%). MRQ total debt to assets at 0.16. MRQ net profit margin has increased to 8.23% from 3.54% one year ago, MRQ Sales/Assets has increased to 0.22 from 0.21, and MRQ Assets/Equity has decreased to 1.75 from 1.96. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 4.47%, current ratio at 1.38, and quick ratio at 1.3. The stock has had a couple of great days, gaining 5.76% over the last week.

*Target price and total debt to assets 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.