In his August 9th, program, Jim Cramer, “Believer of Bull Market somewhere,” shed light on his long list of stock picks. In today’s article, I present the performance of 5 of his stock picks since his call and what is the potential in these stocks going forward. Here is my analysis:
Kimberly-Clark Corporation (KMB)
Kimberly-Clark Corporation is perhaps one of the largest companies in the world involved in paper-based consumer products business. The stock is at the pinnacle of my list with a striking 11.4% return since getting Cramer’s backing on August 9. The company is known in the market for its extremely stable operations, low business risks and several brands that are household names both in America and beyond. The historical financial performance of KMB reveals resonance, solidity and steadiness. With marginal revenue growth during the last five years (average 4.4%), all margins of the company have reflected movement in a very tight range which, along with almost constant debt-equity ratio, denotes a sound business model, lower financial risks and higher management effectiveness. From a valuation strategy perspective, KMB is a defensive stock in its purest sense and an ideal bet in “bear” or “near bear” markets. Because of the constant relationship between its earnings and dividends, KMB’s price earnings ratio and dividend yield normally move in identical but opposite pattern. Even with the recent surge in its share price, KMB offers an attractive 4% dividend yield and is worth consideration for dividend-savvy investors finding something for the “long haul.
International Paper Company (IP)
Being the largest of its kind in the world, International Paper Company is a pulp and paper company and the global supplier of plastic lids and paper cups for fast-food giants: McDonald’s (MCD), Wendy’s (WEN), Subway and Starbucks (SBUX). The stock has fared a 3.6% return since August 9 and stands at number 2 on my list. The recent financial history of the company indicates a mixed pattern at best. Though the top line of the company has recorded 3% growth during the last five years with relatively stable gross margins, the lower part of the income statement has remained marred by the after-effects of significant restructuring activity undertaken during 2005 and 2006 with a severe dip in 2008 when IP suffered a colossal loss of $1.3 billion. However, with a “cleansed” structure and heightened business focus, IP is all set to reach robust earnings growth of 45% and 9% respectively during the next two years along with revival of $1 dividend (per share), according to consensus expectations. Furthermore, based on 2012 full-year earnings, the scrip is currently trading near its one-year low price earnings ratio and a hefty dividend yield of 4.1% which makes it a sanguine combination and credible for contemplation in the short-to-medium term scenario.
Enterprise Products Partners (EPD)
Enterprise Products Partners is an energy pipeline company providing vital infrastructure to producers and consumers of natural gas, NGLs, crude oil, refined products and petrochemicals in North America. Following Cramer’s BUY call, the scrip rose notably during the next six sessions until suffering a 4% backlash on August 17, echoing the broader market sell-off and currently stands at (almost) the same value as on August 09. Being in a business which has lower margins and requires substantial new and maintenance capex on a recurring basis, financial performance of EPD during the last five years depicts a “restricted” picture which is affected by drastic changes in its capital structure. Despite an impressive 22% CAGR in its revenue during this period (which was reflected in its operational margins as well), it was a gigantic surge in its minority interest figure (relating to subsidiaries and associates) which kept the bottom line of the company almost flat during this period. Nevertheless, the scrip’s main attraction is its increasing dividends which, started from 1998, have been growing steadily (5-year CAGR: 7%). Currently, EPD offers a enormous dividend yield of 6% which is not only better than its closest competitors like Spectra Energy Corporation (SE) and Williams Companies Inc. (WMB) i.e. 4.20% and 3.10% respectively, it’s also much better than the current dividend yield of its industry (standing at 3.7%) and Dow Jones Industrial Average (3.1%).
Mercer International Inc. (MERC)
Mercer International Inc. is a pulp production and marketing company with its operational concentration in eastern Germany and western Canada. Since getting Cramer’s confidence, the company has lagged behind the “unchanged” level and has lost more than 5% of its value. With repressed sales during the last four years, stifled margins and red bottom lines in 2008 and 2009, the financial story has not remained fully compelling and this situation is expected to continue in the future also. As per consensus expectations, the bottom line is likely to remain flat during the current year and only marginally higher in 2012. In this background, what makes the stock eye-catching is its dirt cheap level in terms of earnings. The scrip is currently trading at an “indigestibly” low price earnings multiple of 2.77 based on 2012 earnings which makes it more than 2 times cheap compared to its closest competitor IP and even its industry.
Union Pacific Corporation (UNP)
Union Pacific Corporation is the worst performer in my list (of Cramer’s picks) with a negative 8.4% since getting Cramer’s endorsement on August 09. UNP owns and controls the largest railroad network in the United States. On the financial front, the company’s performance can be easily termed as “inspiring.” During the last five years, despite an average 5% growth in its sales, UNP was able to pull an outstanding 22% CAGR in its bottom line with increasing margins in every year. In the backdrop of persistent heavy capex requirements due to the nature of its business, the balance sheet analysis of the company reveals above-average financial management with very low debt-to-equity ratios. With a reasonable dividend yield of 2.5%, consensus 2012 full-year earnings growth expectation of 19.5% translates into an attractive 35% discount to the industry price earnings ratio, making it a sound candidate for mean reversion which should see UNP to perform better.