CNBC’s Jim Cramer analyzed the following 5 stocks on the Tuesday, December 6th episode of Mad Money. The following is my analysis of his recommendations on a valuation basis. I conclude that Cramer was right on DMND, GE, IP and MMM, but wrong on MCP.
Diamond Foods (DMND) - Trading around $27.
This nut and snack foods processor and distributor received a sell recommendation from Cramer. The company’s stock has been falling hard at the onset of an accounting investigation regarding payments to walnut growers. Diamond Foods sought to purchase Pringles brand snacks from Procter &Gamble (PG) with a part-cash, part-Diamond shares deal. On November 22, Diamond Foods announced the suicide of Joseph Silveira. Silveira was a member of the board’s audit committee and long-standing member of the Board of Directors. Many analysts, including those at Jeffries, don’t necessarily feel there is a link between the investigation and Silveira’s death. However, the news has had a negative impact on the stock and made the potential deal with Procter & Gamble much more bleak. Diamond Foods trades at 12.6 times earnings and yields 0.65%. Although the company has made strides in developing and acquiring successful brands such as Emerald Nuts and Pop Secret popcorn, the current investigation is turning worse and the stock should be avoided until it is sorted out. Cramer was right about Diamond Foods because of the company's weaker growth prospects. Opportunities for the company will be tough to come by amid increased competition.
General Electric (GE) - Trading around $16.
Cramer gave this diversified industrial goods manufacturer a buy recommendation. General Electric signed a $300M contract with Saudi Electricity to expand six power plants across the Middle Eastern country to avoid blackouts and meet increased power demands. Bernstein raised its recommendation to Outperform and lifted its price target to $21. Bernstein cited rising energy orders in 2012 and increasing dividends for the increase. General Electric trades at 13.8 times earnings and yields 3.5%. General Electric generated in-line Q3 EPS of $0.31. The company reported revenue of $35.37B, a $430M beat. International revenue is up 25% with “broad-based gains across continents”. Industrial orders were up 16% year-over year. With the outlook on manufacturing looking positive in 2012, General Electric is the kind of company worth owning to take advantage of broad industrial gains. Trading down 9% YTD, now is a good time to pick up shares of GE. Cramer was right about General Electric because the company's shares represent a good value. Using a discounted cash flow model and assuming a standard 10% cost of equity, buyers could see 15% upside from the current price, conservatively.
International Paper (IP) - Trading around $28.
This global packaging and paper company received a buy recommendation from Cramer. International Paper beat quarterly EPS estimates by $0.12 on a $0.92 basis. The company’s $6.6B revenue missed estimates by $160M. Cramer often recommends companies with solid fundamentals and a high dividend yield that pays investors to stick around through negative market headlines. International Paper is trading up 5.14% YTD and the stock yields 3.67%. International Paper will acquire Temple-Inland (TIN) at $32/share plus $600M in debt assumption. The total price for the acquisition will $4.3B. International Paper didn’t experience any quarterly revenue growth, but trades at 8.97 times earnings and has a 5.5% profit margin on its operations. With shipping expected to ramp up during 2012, International Paper is in a position to benefit through its packaging operations. Cramer was right about International Paper because the company is undervalued. Investors are discounting the lack of revenue growth to also include lackluster earnings growth. I think IP has cost-cutting opportunities going forward. The current share price is a relative bargain.
Molycorp (MCP) - Trading around $31.
Cramer gave this rare-earth mining company a sell recommendation. Molycorp is down 31% YTD and, with a 52-week high of $79 per share, appears to be in free fall. The company has made a number of strategic moves that would prove beneficial under normal circumstances. However, Molycorp is hostage to the price and demand of the commodity it mines for. The recent drop in rare earth metal prices hurt both Molycorp’s outlook and stock price. The crash in prices for rare earth metals could help the company in that it would be difficult for would-be competitors to source financing. Molycorp announced that it is “looking to acquire downstream companies that can process rare-earth oxides and produce magnets.” Molycorp’s stock price rose sharply on the announcement of a joint venture with Mitsubishi and Daido Steel to develop and sell next-generation permanent rare earth magnets to be used in both the automotive and home appliance industries. Although Molycorp missed its Q3 estimates and lowered its 2011 production forecasts, the company could benefit from the limited supply of rare earth metals. Molycorp wouldn’t make a good long-term addition to the portfolio, but it would make a good short-term play. Cramer was wrong about Molycorp because of its positioning. Rare earth metal prices should rise with increasing demand from the appliance and vehicle sectors.
3M (MMM) - Trading around $82.
Cramer gave this global manufacturing company a buy recommendation. Due to the company’s broad spectrum of products, technology and innovations, many analysts view the earnings of such companies as 3M and DuPont (DD) as indicators of the overall economy. 3M’s transport and industrial business showed an 8.3% core growth. Barclays’ analysts said those are the businesses that closely matches its industrial peers. 3M trades at 14 times earnings and yields 2.7%. Although 3M missed its Q3 estimates, it confirmed its 2011 EPS outlook of 5.85% and expected sales of $30.2 billion. 3M has a 9.6% quarterly revenue growth rate while Avery (AVY) has a 3.6% quarterly revenue growth rate and trades at 10.47 times earnings. With the global economic outlook poised to benefit if Europe can solve its economic issues and 3M trading close to 20 points off its high, now could represent a buying opportunity. Cramer was right about 3M because of low expectations for its earnings and MMM's ability to beat them.