Company earnings are very closely followed by many investors. The discounted earnings model is a popular model to estimate the worth of a company. The amount of future earnings from the business is estimated for each forecast period and discounted at the appropriate discount rate to determine their present value. The present value of each period of estimated earnings for all future years are then added to determine the total present value.

The last step determines the perpetual value. It's the residual value of the business at the end of the period of years being estimated. This value is discounted to its equivalent present value and added to the present value of the future earnings to determine total intrinsic value. Some investors like adding the book value to this number; we intentionally eliminated the book value as we are evaluating the companies based on earnings power. This model is commonly used to price IPOs and to evaluate a company's worth in an M&A scenario.

A rule of thumb for stock valuation that is popular on Wall Street is to calculate the sum of the expected growth rate of a stock's earnings plus its dividend yield and divide this by its P/E ratio. The higher the ratio, the better, and the famed money manager Peter Lynch recommends investors select stocks with a ratio of 2 or higher and to avoid stocks with a ratio less than 1.

The following is the list of attractive Basic Materials sector companies on the NYSE, valued based on both of the above criteria. We assumed a discount rate of 12%, and that growth will stabilize after the next 5 years and enter a phase of constancy.

**Mechel OAO (NYSE:MTL) **is a Russia-based integrated mining and steel company. The company focuses on the production of mining products, such as coal, iron ore, nickel, and steel products. MTL has a Return on Assets (ROA) of 4.5% and a Return on Equity (ROE) of 15.0%. The company is trading with a Return on Invested Capital (ROIC) of 5.8%. MTL is expected to grow at 14.69% over the next 5 years. The company is expected to earn $2.16 per share next year. The company is valued at $27.4 using the Discount Earnings Model (DEM). The company has a sum of growth and yield to PE ratio (GY2PE) of 2.74. Mechel has a 2.2% yield. MTL is currently trading at $11.42, raising $2.4 or 26% this year. MTL is priced at 50% discount when compared to its earnings potential. Instability in the euro countries is a big concern for this stock.

**Barrick Gold Corp. (NYSE:ABX)** is engaged in the production and sale of gold, as well as related activities, such as exploration and mine development. Barrick also hold interests in oil and gas properties located in Canada. The company has a ROA of 11% and a ROE of 19.2%. The stock is trading with a ROIC of 13.9%. The stock is expected to grow at 33.32 % over the next 5 years. The company is expected to earn $6.11 per share next year. The company is valued at $110.8 using DEM. The company has a GY2PE of 3.98. ABX is currently trading at $48.86, raising $1.4 or 2.8% this year. Having a variety of gold and other basic material stocks can act as a hedge against the euro problems.

**KapStone Paper & Packaging Corp. (NYSE:KS)** engages in the production and sale of unbleached kraft, linerboard, saturating kraft, and unbleached folding carton boards primarily in the Americas, Europe, and Asia. KS has a ROA of 9.4% and a ROE of 17.0%. The company is trading with a ROIC of 12.7%. The company is expected to grow at 42.11% over the next 5 years. KS is expected to earn $1.95 per share next year. The company is valued at $41.8 using DEM. The company has a GY2PE of 3.86. KS is currently trading at $20.53, raising $4.3 or 26% this year. KS is priced at 50% discount when compared to its earnings potential, but maintaining a growth rate above 40% is a challenge in the long run.

**ArcelorMittal (NYSE:MT)** operates as an integrated steel and mining company. The company serves global carbon steel markets, including automotive, construction, household appliances and packaging. ArcelorMittal offers commodity steel, long, flat, carbon steel and alloy products. The company has a ROA of 2.3% and a ROE of 4.7%. The company is trading with a ROIC of 3.4%. The stock is expected to grow at 14.64% over the next 5 years. The company is expected to earn $3.40 per share next year. MT is valued at $41.9 using DEM. The company has a GY2PE of 2.37. MT is currently trading at $21.41, raising $1.6 or 8.3% this year. MT is major steel company trading way below book and earning prospects.

**Cliffs Natural Resources Inc. (NYSE:CLF)** is an international mining and natural resources company. Cliffs produces iron ore pellets, lump and fines iron ore, and metallurgical coal products. The company has a ROA of 16% and a ROE of 35.8%. CLF is trading with a ROIC of 24.8%. CLF is expected to grow at 9.06% over the next 5 years. The stock is expected to earn $11.70 per share next year. The company is valued at $130.3 using DEM. The company has a GY2PE of 1.66. CLF is currently trading at $67.86, raising $2 or 3.1% this year.CLF operating margins and free cash flows are consistently improving over the last 3 years. Value investors cannot ignore CLF as this stock has potential to double in the next 2 years.

**Huntsman Corp. (NYSE:HUN)** is a manufacturer of differentiated organic chemical products and of inorganic chemical products. The company's products consists a range of chemicals and formulations, which it markets globally to a range of consumer and industrial customers. HUN has a ROA of 0.3% and a ROE of 1.5%. HUN is trading with a ROIC of 0.5%. The stock is expected to grow at 14.09% over the next 5 years. The stock is expected to earn $2.12 per share next year. The stock is valued at $26.3 using DEM. The company has a GY2PE of 2.43. HUN is currently trading at $13.74, raising $3.8 or 38% this year.

**Gold Fields Ltd. (NYSE:GFI)** engages in the acquisition, exploration, development and production of gold properties. The company also explores for copper and holds interests in mines located in South Africa, Ghana, Australia and Peru. The company has a ROA of 3.9% and a ROE of 6.0%. The company is trading with a ROIC of 5.0%. The stock is expected to grow at 19.03% over the next 5 years. The stock is expected to earn $2.14 per share next year. The stock is valued at $29.1 using DEM. The company has a GY2PE of 2.40. GFI is currently trading at $15.88, raising $0.11 or 0.7% this year.

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