It is not necessary to spend hundreds or even thousands of dollars to acquire a share of stock in a high quality company. Ample companies exist with stock prices of $20 and below. Here are five companies which have long term competitive advantages and trade at a discount to fair value. I provide the fair value on a discounted cash flow basis as well as the discount rate I used. Where I depart from a 10% cost of equity, I explain why. Please use this research as a jumping off point for your own due diligence.
Mitsubishi UFJ Financial Group, Inc. (MTU)
MTU is a leading Japanese money center bank. Its American Depository Receipts traded recently at a little under $5. Its market capitalization is nearly $66 billion. It is currently trading at a P/E ratio of 6.47. It currently pays an annual dividend of $0.12, for an annual yield of 2.5%.
The Japanese economy had been in the doldrums for a long time, taking its banking center with it. But both the country and its banking sector are now seeing better times. In the most recent quarter ending June 30. 2011, MTU's net profits fell by 11% from the year earlier period. However, that figure was compared to a very strong 2010 quarter. MTU's trailing 12 month return on assets was a stellar 1.54%. That key element of bank financial health puts it into very rarified air compared with its peers such as Mizuho Financial Group, Inc. (MFG) (0.71%) and HSBS Holdings, PLC (HBC) (0.65%). Yet, MTU P/E ratio is lower than these two competitors. My fair value on a historic book value basis is $5.50.
MTU has excellent potential for a long term holding as a “value” money center bank. For individuals in search of such a holding for their money, further research is clearly warranted.
Barclays, PLC (BCS)
Shares of BCS closed recently at roughly $13, near the low end of its broad, 52 week range of $21.69 to $8.38. At current levels, its trailing twelve month P/E ratio is 9.76, and its market capitalization is $39.16 billion. BCS is currently paying a dividend of $0.36, for an effective annual yield of 2.7%
Macroeconomic events of late have benefited large European banks. The negotiated Greek sovereign debt agreement carried with it a requirement that eurozone banks raise a little over 100 billion euros in fresh capital by June 2012, to deal with further sovereign debt issues. While superficially not good news, one thing that markets detest more than capital requirements is uncertainty. Putting a price tag on capital requirements is a net positive for the entire European banking sector. This agreement, at the least, puts money center bank responsibility aside for six months.
BCS posted a solid third quarter, as net profits increased 7% versus the year ago quarter. Further, BCS took steps to reduce its broad exposure to weak sovereign debtors Italy and Spain.
BCS' trailing return on assets, a key measure of bank profitability, was a meager 0.23%, and its return on shareholders' equity was a similarly bleak 5.87. Management's stated goal is to raise that latter number to at least 13% by 2012. If, as is suggested, the European economy has reached its nadir, BCS is an excellent play. On a DCF basis, using an 11% cost of equity for increased risk, BCS is worth around $18 per share. It is best viewed as speculative however, as no soothsayer alive can know what is in store for the ongoing European sovereign debt issue.
AK Steel Holdings Corporation (AKS)
AKS shares were recently trading on the NYSE at a little under $9 per share. Its market capitalization is about $937 million. Its trailing 12 month P/E is not meaningful, as AKS has not been profitable since mid – 2008. It has been paying at annual dividend of $0.20, for an effective yield of 2.2%. AKS is highly volatile, and its 52-week high of $17.88 was reached February 8, 2011, and its low of $5.51 was reached October 4, 2011.
AKS is among the nation's leaders in low carbon, high strength, rolled steel; the kind used by automakers and appliance makers. As such, it has been fully exposed to the recession and slow recovery marking the U.S. economy since late 2008. However, if one believes that the durable goods market in this country will be significantly improving in the next two to three years, AKS will be in for a nice ride. Of course, the opposite is also true. Competitors such as U.S. Steel Corp.(X) and Posco (PKX) face similar challenges, but are more diversified and on stronger financial footings. Speculative investors should tread carefully. On a DCF basis using a 10% cost of equity, AKS is worth around $11 per share in my view.
Banco Sandanter Brasil, S.A. (BSBR)
American Depository Receipts of this leading South American Bank were recently trading at a little over $9 per share. Its 52 week range is $15.66 to $5.75. BSBR's market capitalation at it current price level is approximately $35 billion, and it pays an annual dividend of $0.07 per share, for an effective yield of 0.8%.
BSBR is one of the leading commercial and retail banks in Brazil. As such, it can be viewed as a proxy for the national economy of Brazil. When viewed from that perspective, it is a very healthy bank. BSBR's trailing return on assets is a robust 1.86%., and its operating margins 49.2% also exceed those of competitors such as Banco Bradesco, S.A. (BBD) (37.26%) and Itau Unibanco Holding S.A. (ITUB) (43.99%).
With Brazil's wealth of natural resources and a growing economy, a well run bank such as BSBR is a winning play. On a DCF basis using a 10% cost of equity, BSBR is worth around $12 per share. Further research is necessary as BSBR is not as transparent as similar sized domestic banks.
Host Hotels and Resorts, Inc. (HST)
HST closed recently at around $14 per share, near the midpoint of its 52 week range of $19.88 to $9.78. It is capitalized at a little over $10 billion, and its current P/E ratio is nil, as HST has lost money over the previous year. HST currently pays annually a dividend of $0.16 per share, for an effective yield of 1.1%.
HST is a real estate investment trust, and formerly was part of the Marriott family of companies. It owns and manages upper end hotels across the United States, as well as foreign countries. Since it manages upper end hotels (the average price paid the previous year averaged across all its properties nearly $200.00), its business has suffered due to the gloomy domestic economy as well as European debt uncertainty.
HST does show signs of swinging back to profitability sooner rather than later. In its latest quarter, ending September 30, 2011, its loss was a narrow $0.04 per share, which beat Wall Street estimates of a loss of $0.05 per share. HST's competitors such as Ashford Hostpitality Trust, Inc. (AHT) and Felcor Lodging Trust, Inc. (FCH) posted far steeper losses of late. For those interested in acquiring a REIT with premium properties, HST has potential as a long term investment as it trades at a small discount to its fair value on a DCF basis.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.