From time to time, companies experience situations where exogenous variables depress stock prices. These companies, though sound in terms of operating profitability, face investor disinterest and adverse stock price performance at the bourses. It is imperative to consider these companies in relative value terms to get a better idea of their valuations. In this article, I have analyzed such companies which are trading at cheap multiples relative to their competitors in the industry and are sound in terms of profitability, dividend payout and volatility.
General Mills, Inc. (GIS) is trading at a price to earnings ratio of 17 times, compared to its industry average of 18. The company yields 3.00%, with a payout ratio of 50%. The stock is earmarked with low volatility, evident from the low beta of 0.16, and higher profit margins when compared to the industry. The 13.7% expected quarterly revenue growth of General Mills compared to 11.9% of the industry, and operating profit margin of 16.08% against the industry's 8.42%, reestablish the strong position of the company compared to its peers. After operating the Yoplait brand under license for over 30 years, General Mills has successfully acquired more than 50% of Yoplait S.A.S. This acquisition, along with the previous Mountain High (Dean Foods) yogurt brand, has enabled the company to double its yogurt business. Strong footing in the 'Processed & Packaged Goods' industry, attractive profit margins and payout ratio are factors that place General Mills among attractive investment opportunities.
Kimberly-Clark Corporation (KMB) is trading at a price to earnings multiple of 17.6 times against the industry's 21 times, making it cheap on a relative basis. The company has a payout ratio of 66%, and a forward annual dividend yield of 3.8%. An attractive payout ratio coupled with superior operating profit margins of 14.08% against the industry at 10.25%, make Kimberly-Clark attractive at its current price. The company has been struggling in recent times due to the input cost inflation, though initiatives by the company have reduced this pressure to a certain extent, only volumetric growth in sales will drive earnings. The company has been able to pass the higher input cost to the end consumer via price hikes. I believe that the company's ability to increase prices and the increasing market share in baby care products and female hygiene products will bode favorably for the company.
Procter & Gamble Company (PG): Despite increasing input costs, generally experienced by 'Personal Goods' industry, Procter & Gamble has been able to maintain its gross margins at 50% as compared to the 47% of the industry (Johnson & Johnson at 64%). The company remains attractive at its cheap price to earnings multiple of 16 times, against the industry average of 21 times. Procter & Gamble, along with other players, bears the brunt of decreasing consumer spending. In order to compensate, the company has aggressively worked on increasing market share, and has also resorted to divesting non-core operations (latest sale of Pringles). Procter & Gamble is trading at a discount of 8% to its median target price of $72.00. The stock is currently in the oversold level as depicted by its Relative Strength Index of 42; positive announcements may provide impetus to the stock price resulting in mean reversion.
Avon Products, Inc. (AVP): By eliminating intermediaries, Avon Products has been able to enjoy competitive prices that translate into higher gross profit margins when compared to the industry. The company's last reported gross margin was 63% compared to the industry's margin at 47%. The geographically diversified customer base of Avon Products (Asia, Europe and America) has reduced exposure to economic downturns of individual countries. With commendable operating margins and a sound distribution mechanism, the company promises attractive returns. Avon Products reported a return on equity of 44%, and has maintained a dividend payout ratio of 54%. It is trading at a price to earnings multiple of 11 times, compared to the industry's 21 times, making it cheap at its current price.
Nokia Corporation (NOK) has faced stiff competition from Apple's iPhone and Google's Android-based phones. Its Symbian platform stands ill-equipped to compete with the advanced functionalities that its rivals stand to offer. The recent partnership of Nokia with Microsoft (MSFT) to introduce 'Lumia' may be a good break into the revolutionized smartphone industry. Nokia's easy interface combined with the universal 'Windows' platform may drive the company out of shadows. Nokia Corporation is trading at a cheap price to sales multiple of 0.39 times, against the industry average of 0.97 times. Its shares are currently in the oversold region, with a Relative Strength Index of 36. Market appreciation of the new venture between Nokia and Microsoft may drive stock price, creating profit opportunity. The median target price for the share is at $6.5, which provides a potential 15% upside from the current price of $5.61.
Stock information source: Yahoo Finance