by Michael Barton
Some stocks look worse than their rivals on key measures, and investors are put off from adding them to their portfolio. Here we look at five such stocks. The numbers don’t look fantastic when compared to competitors, but should they be shunned? Here is my analysis:
Research in Motion Limited (RIMM): Shares are trading at $22.65 at the time of writing, and at the low end of their 52-week trading range of $20.41 to $70.54. At the current market price, the company is capitalized at $11.79 billion. Earnings per share for the last fiscal year were $5.48. The company pays no dividend.
The company’s flagship Blackberry smartphone continues to sell well, though market share has dwindled due to competitors such as Apple (AAPL) and its iPhone. Research in Motion entered the tablet market with its PlayBook, however it is slashing prices as consumers shun it in favor of the iPad. Amazon’s (AMZN) new product, the Kindle Fire, will likely draw more potential purchasers away from the PlayBook. With all this competition, it is no surprise that Research in Motion lowered its own profit forecasts earlier this year.
Onward to the numbers. RIMM’s quarterly revenue is declining by 9.80%, Apple’s is increasing by a whopping 82%. Operating margins at RIMM are 19.48%. Compare this to Apple’s 30.43%, and Microsoft’s (MSFT) 39.31%, which indicate that RIMM has rested on its laurels too long and is in terminal decline. RIMM is due to enable NFC (near-field communications) that allow mobile payments, in place of a debit card and the archaic magnetic strip. Consumers are likely to respond positively to this safety improvement, and this may turn its fortunes around in the short-run. Perhaps Blackberry will set the trend in payment processing in the future.
At lowered forecasts of $4.80 earnings per share next year, shares have a forward price to earnings multiple of 4.71. With iconic investor and company turnaround specialist, Carl Icahn rumored to be looking at shares, the sell off looks to be well overdone.
Alcoa Inc. (AA): Shares are trading around $10.50 at the time of writing, at the bottom end of their 52-week trading range of $9.91 to $18.47. At the current market price, the company is capitalized at $11.15 billion. Earnings per share for the last year were $0.87, placing the shares at a price to earnings ratio of 11.99. It paid a dividend of $0.12 last year (a yield of 1.10%).
The fortunes of Alcoa are inextricably linked to the fortunes of the economy. When manufacturers need its aluminum, the company will make good money, but when the market turns south, profits are likely to be hit. However, the company’s operating margin is better than rival, Aluminum Corporation of China (ACH), which shows a margin of just 3.38% versus AA’s 8.20%. Its price to earnings multiple is below the industry average of 14.47, and cash flow is very attractive ($2.32 billion last year). It is in a strong position to weather any economic storm, and shares could outperform a sluggish market from their current low level.
Boeing Co (BA): Shares are trading at $62.78 at the time of writing, compared to their 52-week trading range of $56.01 to $80.65. At the current market price, the company is capitalized at $46.35 billion. Earnings per share for the last fiscal year were $4.73, placing the shares at a price to earnings ratio of 13.28. It paid a dividend of $1.68 last year.
Boeing has recently delivered the first of its Dreamliners to Japan, three years behind schedule. It has said that its production of 787s will not turn profitable until 2020. However, revenue growth is better than growth at rival Lockheed Martin (LMT), at 6.20% versus 2.40%, respectively. So, too, is the gross margin of 19.34% (against 10.54%). Boeing has lost ground to the European Airbus project over recent years, but may be fighting back. Indeed, British Aerospace (BA.L) has just announced 3,000 job cuts due to decreased activity at the European manufacturer. Russia’s Utair has recently ordered 40 737s from Boeing, and the delivery schedule of Dreamliners should keep production and cash flow rolling for several years. This should protect the dividend going forward. A stock where the bad news is known and admitted by company management, that has production guaranteed for several years, and will be well placed to take advantage of new orders, and yielding 2.70% by way of its dividend.
News Corporation (NWSA): Shares are trading at $16.48 at the time of writing, within their 52-week trading range of $12.88 to $18.35. At the current market price, the company is capitalized at $43.29 billion. Earnings per share for the last fiscal year were $1.04, and it paid a dividend of $0.19, yielding 1.20%.
News Corp’s UK subsidiary, News International, has come increasingly under the spotlight for malpractice-- in particular its telephone hacking in the UK and, potentially, News Corp. worldwide. It is now alleged that the company paid spies for scooping stories. Top executives are leaving the News International in droves, the latest being the company’s senior communications executive, Alice MacAndrew. However, News Corp. has taken remedial action by closing the offending newspaper, The News of The World. It is likely that the company will be hit with litigation claims arising from this debacle, but these will pale in significance when compared to worldwide business cash flows. Quarterly revenue growth is running at 10.5%, cash flow is huge, and the operating margin holds up nicely at 14.89%. The bad news, and expectation of more, is already factored into the share price. Do not be scared to take a chance with these shares.
USG Corporation (USG): Shares are trading around $7.30 at the time of writing, at the bottom of their 52-week trading range of $7.00 to $19.91. At the current market price, the company is capitalized at $774.93 million. The company lost $3.87 per share last year.
With the economy so downbeat, and the housing market still hurting, it is no wonder that the fortunes of building materials companies are so bearish. With commodities prices rising, and forward sales prices under pressure, margins in its businesses are coming under pressure, too. There seemed to be some light at the end of the tunnel when the home price index showed some signs of recovery back in the second quarter of this year. However, since then, figures have shown that new home sales have fallen by 2.3% between July and August, though sales are still 6.1% higher than a year earlier. The worst 16 months on record for new home sales have been the last 16 months. Compared to the peak in July 2005, new home sales are down 78.8%. Throughout this time, USG, like other building materials suppliers such as Vulcan Materials (VMC), and Cemex (CX), has suffered. Last year, losses at USG exceeded $390 million. The company now has $560 million of cash in the bank. Ratings agency Fitch has recently downgraded its credit rating. If you think we have bottomed out on the economy, then USG represents a reasonable play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.