4 Great Value Investments And 1 To Avoid In 2012

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 |  Includes: CMO, PKY, RGA, WHR, XRX
by: Dividend Kings

A few high-quality stocks are now trading at a deep discount to their book value. The latest global financial turmoil created a number of deep value investment opportunities for bargain hunting investors. In this article, I have analyzed what I consider to be wide-moat, low-risk stocks that have trading prices which are close to or under their book value per share, in order to identify value investment opportunities. Using my unique analysis of their fundamentals I have found four stocks -- Xerox (NYSE:XRX), Whirlpool (NYSE:WHR), Reinsurance Group of America (NYSE:RGA) and Capstead Mortgage (NYSE:CMO) -- which I believe warrant further investigation as deep value investment opportunities, and one, Parkway Properties (NYSE:PKY), that could remain an opportunity for short-sellers. As always, use my analysis as a starting point for conducting your own due diligence prior to investing.

Xerox Corporation (XRX)

Xerox is the largest company in the business equipment industry with a market cap of $11 billion. It develops, manufactures, markets, services, and finances; document equipment, software, and solution services worldwide. It has a 52 week trading range of $6.55 to $11.79, and its price for the year to date has dropped by 31% to around $8. At its current trading price it has a price to earnings ratio of 11.

Xerox’s third quarter 2011 earnings dropped by 2% to $5.5 billion from second quarter earnings of $5.6 billion, although for this period net income rose 0.3% to $320 million. Xerox’s balance sheet weakened during this period, with a 29% drop in cash and cash equivalents to $785 million, although long-term debt decreased in the same period by 0.2% to $7.1 billion.

Xerox is currently trading at around a 15% discount to its book value per share of $9.21 and is delivering a return on equity of 9%, indicating that it is a compelling value investment. However, prior to investigating Xerox’s investment potential any further let’s see how it stacks up against its competitors from a value perspective.

VeriFone Systems (NYSE:PAY) has a market cap of $3.6 billion and is down 10% for the year, trading at around $36, with a price to earnings ratio of 12. This price represents a 271% premium on its book value per share of $11.35. It has a return on equity of 40%. Diebold (NYSE:DBD) has a market cap of $1.9 billion and is down 4% for the year, trading at around $30. This price represents a 200% premium on its book value per share of $13.37. It has a return on equity of -6%.

As you can see, Xerox’s competitors are trading at substantial premiums to their book values, yet with similar price to earnings ratios to Xerox, and only VeriFone is delivering a superior return on equity.

When we consider Xerox’s earnings yield, I believe it becomes even clearer that the stock is undervalued by the market, as it has an earnings yield of 9%, which is more than double current bond yields.

Furthermore, Xerox has completed its acquisition of ACS, which allows it to broaden its business into pension administration and human resources outsourcing, with the added benefit that it has the opportunity to establish itself as one of the largest third party pension providers in the world. All of which bodes well for future earnings and income growth. The future earnings and income growth potential of Xerox becomes even more clearer when we consider that it has a PEG ratio of 0.19, combined with a strong balance sheet that has a relatively conservative debt to equity ratio of 0.71.

The final reason for considering an investment in Xerox is that besides being undervalued at current prices with solid earnings growth potential, the company pays an annual dividend of 17 cents per share, which equates to a handy dividend yield of 2%.

For all of these reasons, I don’t believe that Xerox will see any further significant price drops, and at its current price it is a compelling value investment opportunity. I would expect Xerox on the basis of its strong fundamentals to rise in value and I believe it is a solid candidate for further research and analysis.

Whirlpool Corporation (WHR)

Whirlpool with a market cap of $3.6 billion is the largest company in the appliances industry and it manufactures and markets home appliances worldwide. It has a 52 week trading range of $45.22 to $92.28 and it has seen its price drop by 47% this year to be currently trading at around $47. This is close to its 52 week low. At its current price it has a price to earnings ratio of 10.

The poor global economy and lower consumer discretionary spending has had an effect on the consumer durables industry and this has been no different for appliance manufacturers such as Whirlpool. For the third quarter 2011, Whirlpool reported a 2% decrease in earnings to $4.6 billion, down from $4.7 billion for the second quarter. However, for the same period it saw a massive 210% increase in net income to $177 million, up from -$161 million in the second quarter. In the third quarter 2011 its balance sheet weakened with cash and cash equivalents dropping by 40% to $511 million, although long-term debt decreased by 0.5% to $2.13 billion.

Whirlpool is a solid value investment candidate with a current trading price of $47, which is a 17% discount to its book value per share of $56.77 and a return on equity of 8%. All of which compares quite favorably in comparison to its competitors.

Lennox International (NYSE:LII) has a market cap of $1.7 billion and is down 30% for the year trading at around $33 with a price to earnings ratio of 18. It is trading at a 251% premium to its book value per share of $9.39, with a return on equity of 19%.

National Presto Industries (NYSE:NPK) has a market cap of $11.7 billion and is down 23% for the year trading at around $97. It is trading at a 106% premium to its book value per share of $46.98, with a return on equity of 18%.

Both of Whirlpool’s competitors are trading at substantial premiums to their book values, yet with similar price to earnings ratios, although both are delivering superior returns on equity. When considering Whirlpool’s current earnings yield of 9%, which is more than double current bond yields, it becomes even clearer that the market has substantially undervalued the company.

I also believe that Whirlpool’s strong balance sheet with a conservative debt to equity ratio of 0.58 and profit margin of 4%, indicate that the company is well positioned to capitalize on any uplift in the economy leading to improved future net income. Finally Whirlpool pays a dividend of $2 per share, which is an attractive dividend yield of 4% providing a handy income to yield hungry investors.

For all of these reasons I believe that Whirlpool is an excellent value investment opportunity that is undervalued by the market and is worthy of further investigation and analysis.

Reinsurance Group of America Inc (RGA)

As the tenth largest life insurance company in the US with a market cap of $4 billion, it provides individual and group life, health, annuity, critical illness, and financial reinsurance products. The company’s customers are primarily life insurance companies and it operates worldwide. It has a 52 week trading range of $44.51 to $64.32 and its price is down by 5% for the year trading at around $52. The company has a price to earnings ratio of 6.

Reinsurance Group of America reported a 10% decrease in third quarter earnings down to $2 billion from $2.2 billion for the second quarter. For the same period it saw an 11% rise in net income to $147 million, up from $132 million in the second quarter. For this period it also strengthened its balance sheet with cash and cash equivalents rising by 13% to $803 million and long-term debt dropping by 8% to $2.4 billion.

At its current price Reinsurance Group of America is trading at a 32% discount to its book value per share of $76.43, while delivering a return on equity of 12%. This I believe makes it a solid value investment opportunity at this time and a candidate for further investigation. Overall Reinsurance Group of America stacks up well as a value investment when compared to its competitors.

MetLife (NYSE:MET), the largest life insurer by market cap of $33 billion, is down 31% for the year, trading at around $31, with a price to earnings ratio of 6. This means that with a book value per share of $57.44, it is trading at a 46% discount to its book value, with a return on equity of 11%.

Prudential (NYSE:PUK), the second largest life insurer by market cap of $25 billion, is down 6% for the year and is trading at around $19. It is trading at an 82% premium to its book value per share of $10.44.

Reinsurance Group of America stacks up quite well; it is trading at a lower discount to book value per share than MetLife but with a superior return on equity. Prudential is trading at a substantial premium to book value per share but with a lower return on equity when compared to Reinsurance Group of America.

I further believe that the company is undervalued by the market when its earnings yield of 16%, which is more than four times current ten year bond yields, is considered.

Reinsurance Group of America has a solid balance sheet as indicated by its very conservative debt to equity ratio of 0.29, which when coupled with its cash position means it is well positioned to capitalize on any growth opportunities. Furthermore, the company has solid future growth prospects when its PEG ratio of 0.20 is considered. For these reasons alone, I believe that the company should see its stock price rise. Reinsurance Group of America also pays a dividend of 72 cents per share, which is a yield of 1%, and based on its current balance sheet it should be able to sustain that dividend payment in the future.

For all of these reasons I believe that Reinsurance Group of America is unfairly valued by the market and at current prices represents a solid value investment opportunity that should rise in value. Accordingly I have no hesitation in strongly suggesting it is a candidate for further investigation and analysis.

Capstead Mortgage Corporation (CMO)

Capstead is the thirteenth largest listed diversified REIT in the United States with a market cap of $1 billion. It operates as a self-managed real estate investment trust that invests in a leveraged portfolio of residential mortgage securities consisting primarily of adjustable rate mortgage securities issued and guaranteed by government sponsored enterprises. Due to its structure, Capstead must distribute at least 90% of its annual taxable income to its stockholders. It has a 52-week trading range of $10 to $13.95, and for the year it is up by 13%, trading at around $13 with a price to earnings ratio of 8.

For the third quarter 2011, Capstead reported a 4% decrease in earnings to $45 million, down from $47 million for the second quarter. It also saw a 4% drop in net income for the same period to $41 million and its balance sheet weakened with cash and cash equivalents dropping by 53% to $121 million for the third quarter.

Capstead has a book value per share of $12.66, and at its current price is trading at a premium of 3% to its book value with a return on equity of 14%. This I believe makes Capstead a good value investment opportunity, especially in comparison to its competitors.

Public Storage (NYSE:PSA) the largest diversified REIT by market cap of $23 billion, is up 35% for the year, trading at around $135 with a price to earnings ratio of 44. It is trading at a 344% premium to its book value per share of $30.43 with a return on equity of 9%.

By way of comparison, Annaly Capital Management (NYSE:NLY) the second largest diversified REIT by market cap of $16 billion is up 3% for the year trading at around $16. It is trading at a 1.5% premium to its book value per share of $16.24 with a return on equity of 9%.

When compared to Public Storage, Capstead is trading at a substantially lower premium to its book value per share and has a superior return on equity. In comparison to Annaly, Capstead is trading at a marginally higher premium to its book value per share but is delivering a superior return on equity.

Furthermore, I believe another indicator of Capstead being undervalued is its earnings yield of 13%, which is more than 3 times the current ten year bond yield.

Capstead also has promising growth prospects with a PEG of 0.13 combined with a profit margin of 57%, which means that it should be able to capitalize on any uplift in the economy and translate increased earnings into a healthy profit. It also pays a dividend of $1.72 per share, which is a highly attractive dividend yield of 13.2% and the fourth highest in its industry.

For all of these reasons, I believe that Capstead at current prices is undervalued by the market and is a solid value investment opportunity that warrants further investigation and analysis.

Parkway Properties Inc (PKY)

Parkway Properties is a REIT with a market cap of $223 million that acquires, operates and manages office properties principally in the southeastern and southwestern United States and in Chicago. It has an interest in approximately 64 office properties located across 11 states and as a REIT is required to distribute 90% of its taxable income to shareholders.

It has a 52 week trading range of $9.40 to $18.61 and for the year to date has seen a 44% drop in value trading at around $10. Parkway has seen both a drop in earnings and net income for the third quarter 2011. Earnings dropped by 25% to $48 million and net income dropped by a massive 341% to -$53 million. For the same period its balance sheet strengthened, even though cash and cash equivalents dropped by 0.9% to $33 million, as long-term debt fell by 14% to $945 million.

Parkway has a book value per share of $24.95, the fifth highest in its industry, and at current prices it is trading at a 60% discount to its book value per share. On initial appearances this makes Parkway an attractive value investment with assets exceeding liabilities, but on deeper analysis I don’t believe that Parkway is that attractive. Firstly it has a return on equity of -16% which for a stock trading at such a deep discount to its book value indicates further issues with the company and its balance sheet valuation. Secondly it has a profit margin of -80% and this indicates that it is having significant difficulty generating a positive net income. Thirdly, the company has an earnings yield of -41%, which when compared to current bond yields indicates that the company is significantly overvalued at current prices.

Parkway is also being substantially outperformed by its competitors, with both Digital Realty Trust (NYSE:DLR) and Liberty Property Trust (LRY) having superior returns on equity of 7% each. They also have superior profit margins of 12% and 20% respectively.

Clearly the fundamentals of this company indicate that at current prices it is heavily overvalued, and I believe that it can only further decrease in value. I do not believe the company warrants further investigation or research.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.