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Company earnings are very closely followed by many investors. 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 forecasted 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 IPO's and to evaluate company's worth in a 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. 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 the top seven attractive Consumer Discretionary sector companies in the S&P 500 valued based upon both the above criteria.

*We assumed a discount rate of 12% and the growth will stabilize after the next 5 years and enter a constant phase.

Goodyear Tire & Rubber Co (NASDAQ:GT): The Goodyear Tire & Rubber Company engages in the development, manufacture, distribution and sale of tires, and related products and services to consumer and commercial customers worldwide. It offers various lines of rubber tires for automobiles, trucks, buses, aircraft, motorcycles, farm implements, earthmoving and mining equipment and various other applications. The company has a Return on Assets (ROA) of 4.43% and a Return on Equity (ROE) of 26.65%. The company is trading with a Return on Invested Capital (ROIC) of 5.9%. Goodyear is expected to earn $2.54 per share next year. Goodyear is expected to grow at 30.38% over the next 5 years. The company is valued at $43.2 using the Discount Earnings Model (DEM). The company has a sum of growth and yield to PE ratio (GY2PE) of 5.06. Goodyear is currently trading at $12.59, falling $1.58 or 11.2% this year. Goodyear is the significantly undervalued stock in this sector.

Gannett Co Inc (NYSE:GCI): Gannett Co., Inc. is an international media and marketing solutions company. The company provides consumers with the information through the Internet, mobile, newspapers, magazines and television stations. The company operates in three segments: Publishing, digital and broadcasting. The company has a ROA of 8.4% and a ROE of 31.2%. The company is trading with a ROIC of 12.8%. The stock is expected to earn $2.13 per share next year. The stock is expected to grow at 6.10% over the next 5 years. The company is valued at $22.7 using DEM. The company has a GY2PE of 1.10. Gannett is currently trading at $14.55, raising $0.74 or 5.4% this year.

Ford Motor Co (NYSE:F): Ford Motor Company primarily develops, manufactures, distributes and services vehicles and parts worldwide. Ford and its subsidiaries are also engaged in financing vehicles. The company is expected to earn $1.70 per share next year. The company is expected to grow at 3.96% over the next 5 years. The stock is valued at $17.0 using DEM. The company has a GY2PE of 0.54. Ford is currently trading at $12.72, raising $1.6 or 14% this year.

Johnson Controls Inc (NYSE:JCI): Johnson Controls, Inc. provides automotive interiors. Johnson Controls engages in building efficiency, automotive experience and power solutions businesses worldwide. Johnson Controls has a ROA of 6.1% and a ROE of 15.3%. Johnson Controls is trading with a ROIC of 11.3%. The company is expected to earn $3.37 per share next year. The company is expected to grow at 15.18% over the next 5 years. The stock is valued at $42.6 using DEM. The company has a GY2PE of 1.58. Johnson Controls is currently trading at $33.26, raising $1 or 3.2% this year.

Block H & R Inc (NYSE:HRB): H&R Block, Inc. is a tax service provider. H&R Block has subsidiaries that provide tax, banking and business and consulting services. The company has a ROA of 6.6% and a ROE of 49.7%. HRB is trading with a ROIC of 8.4%. H&R Block is expected to earn $1.65 per share next year. The company is expected to grow at 10.64% over the next 5 years. The company is valued at $19.1 using DEM. The company has a GY2PE of 1.40. H&R Block is currently trading at $16.32, raising $0.08 or 0.49% this year.

Harman Intl Industries Inc (NYSE:HAR): Harman International Industries, Inc. is engaged in the developing, manufacturing and marketing of audio products and electronic systems. The company has developed a range of product offerings, which are sold under brand names AKG, Crown, JBL, Infinity, Harman/Kardon, Lexicon, dbx, BSS, Studer, Soundcraft, Mark Levinson, Becker and Selenium. The stock has a ROA of 8.8% and a ROE of 20.0%. The stock is trading with a ROIC of 14.2%. The company is expected to earn $3.84 per share next year. The company is expected to grow at 22.69% over the next 5 years. Harman is valued at $56.3 using DEM. The company has a GY2PE of 1.59. Harman is currently trading at $48.80, raising $10 or 26% this year.

Time Warner Inc (NYSE:TWX): Time Warner Inc. operates as a media and entertainment company in the United States and internationally. Time Warner operates in three segments: Networks, Filmed Entertainment and Publishing. The company has a ROA of 3.9% and a ROE of 7.8%. The company is trading with a ROIC of 5.3%. The company is expected to earn $3.65 per share next year. Time Warner is expected to grow at 10.38 % over the next 5 years. Time Warner is valued at $41.9 using DEM. The company has a GY2PE of 1.20. Time Warner is currently trading at $37.14, raising $0.81 or 2.2% this year.

Source: 7 Consumer Discretionary Stocks With Earnings Power