By Delian Naydenov
In this article I will discuss five companies which have attractive valuations and current prices that offer a good entry point. The first two companies pay generous income to their shareholders in the form of dividends and the next three offer growth but still have well-established and proven business models. Most importantly, all five companies are undervalued relative to their peers and barring any "black swan" event are good buying opportunities.
Marathon Oil (MRO) traded at around $32 per share at the time of this writing, has 703.8 million shares outstanding for a market capitalization of $22.7 billion and a dividend yield of 1.9% per year. The company has promising exploration projects for oil, gas and oil sands in the U.S. and around the world. In June of 2011, MRO spun-off its downstream operations into a separate company (for more information on the spin-off click here) and is now a pure play exploration and production company. With the demand and price of oil expected to increase, Marathon Oil is well positioned to improve its sales and margins. Currently, the shares are undervalued due to the reduced ability to accurately estimate its future earnings power on a stand alone basis. At the same time, its fundamentals are below industry average with a price to book value ratio of 1.4 and a price to earnings ratio of 8.2. In addition, the company had a solid cash flow from operations and repurchased 12 million shares during the third quarter of 2011. All this together with an experienced management and coordinated global exploration efforts, makes Marathon Oil an excellent buy.
Annaly Capital Management (NLY) is trading around $17 per share as of this analysis, has a fifty two week trading range between $14.05 and $18.79 per share, has 970 million shares outstanding for a market capitalization of $16 billion and paid $2.28 per share in the past twelve months for an annual dividend yield of about 13.5%. Annaly, which borrows money and invests it in agency backed mortgage backed securities, has weathered the sub-prime crisis surprisingly well. It generated $3.4 billion of free cash flow for the first nine months of 2011. What makes Annaly profitable is that it invests in relatively secure mortgages and is able to borrow at record low short-term rates, making a profit from the spread. Two recent events bode well for the company. On January 24, 2012 in his State of the Union speech, President Obama emphasized that his policy would be to reduce foreclosures and allow more people to keep their mortgages which should make Annaly mortgage backed investments even more stable. A more positive news came the following day when the Federal Reserve announced that it intends to keep interest rates low until at least the end of 2014. With an annual dividend yield in the double digits and price to earnings ratio of 8.6, Annaly is a buy.
Oracle (ORCL) recently traded around $28 per share, has a fifty two week trading range from a low of $24.72 to a high of $36.50 per share, pays $0.06 per share for an annual dividend yield of 0.8%, and has 5,026 million shares outstanding for a market capitalization of $143.3 billion. Oracle has been able to grow its sales at a 20% pace per year on average for the past five years and, as most large-cap software and technology companies, has above average earnings before interest, tax and depreciation (43%). Its balance sheet is rock-solid, the company generated $13.1 billion of cash flow from operating activities during the twelve months ended November 30, 2011 and it has been successful in acquiring and integrating other software and hardware companies (Sun Microsystems in 2010, BEA Systems in 2008, and Hyperion Solutions in 2007, among other). Overall, Oracle is a leader in the technology area and continues to increase sales, repurchase its own shares and bring value to shareholders.
From a software company that helps make businesses and workers more efficient I am moving to a software company that creates games to play during our free time. Activision Blizzard (ATVI) traded at around $12 per share at the time of this writing, pays an annual dividend of $0.165 per share for an annual yield of about 1.4%, has a fifty two week trading range between $10.40 and $14.40 per share, and has 1,144 million shares outstanding for a market capitalization of around $14 billion. Activision is a company with a strong balance sheet ($2.9 billion of cash and zero debt), a price to book ratio of 1.3, and an EBITD margin of 25.6%. In addition, the company is repurchasing shares and as of September 30, 2011 it has approximately $998 million left under an authorization to repurchase its own shares. Activision's own guidance for full 2011 earnings per share is above $0.76 which gives a price to earnings ratio of 15.8, slightly above the S&P 500 price to earnings ratio of 14.3. At the same time Activision product pipeline is strong as the company has several popular franchises, an exclusive deal with Marvel Enterprises (Spider Man and X-Men) and an alliance with DreamWorks Animation (DWA).
DirectTv (DTV) trades around $44 per share at the time of this writing with a fifty two week trading range between $39.82 and $53.40 per share and has 705.6 million shares outstanding for a market capitalization of about $31 billion. DirecTv has a share repurchase plan under which the company has repurchased $4.4 billion for the first nine months of 2011 and has over $1.5 billion left under its current repurchase plan. DirectTv has an exposure to the Latin American market and currently derives about 20% of its revenue from Brazil, Mexico, Argentina, Chile, Colombia, and Venezuela. For the first nine months of 2011 DirecTv generated $7.3 billion of cash from operations, has a price to earnings ratio of 13.7 which is under the S&P 500 average and at the same time has an above average growth rate. Overall, at the current price, DirecTv is a an attractive company which operates in a very profitable industry and offers exposure to emerging markets growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.