CNBC’s Jim Cramer analyzed the following five stocks on the Wednesday, November 30th episode of Mad Money. The following is my analysis of his recommendations on a valuation basis. I conclude that Cramer was right on Radio Shack, Deckers and Citigroup, but wrong on Cummins and Pengrowth.
Cummins (NYSE:CMI) - Trading around $96.
This diesel and natural gas engine maker has been a favorite of Cramer’s for months now. Although Cummins beat its Q3 estimates, the company lowered both its full-year profit and sales outlook. President and COO Tom Linebarger said, “Government actions to reduce inflation in India and China have resulted in softer near-term demand.” Trading at a low multiple of 11.3 times earnings and offering a 1.6% dividend yield makes Cummins a manufacturing stock worth considering. However, Caterpillar (NYSE:CAT) has a broader product offering and more of a bullish 2012 outlook. Caterpillar is also heavily dependent on China for growth in 2012. With negative market sentiment and fears of a double-dip recession at an all-time high, 2012 may be a tough year for equipment makers. Cummins’ fundamentals make an arguable case to own shares. Cummins has 36% quarterly revenue growth, 25.28% gross margin and 9.7% profit margin. In any case, market volatility and weak demand are too hard to ignore. Cramer was wrong about Cummins.
Radio Shack (NYSE:RSH) - Trading around $11.
This embattled consumer electronics retailer received a sell recommendation from Cramer. S&P recently cut the company’s debt rating to BB- from BB, which is three notches below investment-grade. Radio Shack reported a bad quarter in which it missed on revenue by $10M and EPS by $0.21. S&P expects the company to continue its poor operating performance throughout 2012. The weak macroeconomic environment and increasing competition for its wireless services just adds to the company’s woes. Competition from online retailers like Amazon (NASDAQ:AMZN) only worsens its outlook. Office Max (NYSE:OMX), another struggling firm, announced a program with Radio Shack in which Radio Shack’s employees will sell wireless phones, electronics and service plans. The plan will initially include 15 Office Max stores in the San Francisco area. Not much is expected from the deal, as Radio Shack’s stock is down 38% YTD. Cramer was right about Radio Shack.
Deckers Outdoor (NASDAQ:DECK) - Trading around $108.
This Cramer-favorite retailer, primarily known for its UGG brand, is a retailer worth owning in this volatile market. Deckers has done an excellent job of cultivating and managing brands that consumers tend to covet. Both Barclays and Jeffries reaffirmed their Buy ratings for Deckers. It’s worth noting, however, that a rise in raw material costs could impact short-term profits. Deckers is up 37% YTD and the stock trades at 26 times earnings. With a 49% quarterly growth rate, 50% gross margin and a 13.6% profit margin, it’s safe to say that the company’s fundamentals are intact. Deckers reported a strong third quarter in which it generated $1.59 EPS, a $0.24 beat, and delivered revenue of $414M, beating estimates by $27M. Deckers' reported revenue was a 49% year-over-year increase. Not just for the holiday season, Deckers stock is worth owning throughout 2012. Cramer was right about Deckers Outdoor.
Citigroup (NYSE:C) - Trading around $27.
To say that bank stocks have been a mess as of late would be a gross understatement. Citigroup is no exception, which is why Cramer gave the bank a sell recommendation. With the stock trading down 42% YTD, its safe to say Cramer isn’t the only one with negative sentiment toward Citigroup. The constant ups and downs of lawsuits, global economic uncertainty and downgrades have made bank stocks worthy of avoidance. While an SEC settlement decision was thrown out, the Massachusetts attorney general sued Citigroup, along with Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Ally Financial and JPMorgan (NYSE:JPM) over “deceptive conduct in the foreclosure process.” As for the fundamentals, Citigroup has a 22% operating margin, an 11% profit margin and 18% quarterly revenue growth. The stock trades at 7.5 times earnings. All in all, why take the risk? Cramer was right about Citigroup.
Pengrowth Energy Trust (NYSE:PGH) - Trading around $10.
This Canada-based oil and natural gas producer received a buy recommendation from Cramer. Cramer often recommends stocks with high dividends and Pengrowth Energy Trust isn’t any different. The stock yields 7.8%. Trading at 33 times earnings and boasting a share price of around $10, it’s quite clear why the stock would be enticing to investors. The company has a larger quarterly revenue growth rate and gross margin than Canadian Natural Resources (NYSE:CNQ), its much larger competitor. Pengrowth has a 10.5% QRG and 62% gross margin compared to Canadian Natural Resources’ 8.7% and 56%. The stock is trading down 20% YTD, which may present a buying opportunity for investors looking to get in at a good rate. Although it’s not a bad stock, there are much better oil and gas plays, like EOG Resources (NYSE:EOG), that have more productive assets. I think Cramer was wrong on Pengrowth Energy Trust.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.