In Thursday's edition of Lighting Round on his Mad Money program, Jim Cramer was bullish on 6 stocks. His bullish picks were McDonald's (MCD), Wells Fargo (WFC), BGC Partners (BGCP), Cummins (CMI), Magna International (MGA) and Celgene (CELG) while he was bearish on Office Depot (ODP), Giant Interactive Group (GA), Alpha Natural Resources (ANR) and Weight Watchers (WTW).
As always, I will be only be examining his bullish calls to determine if it makes sense to open a position in his recommendation at current levels. Some basic information about his bullish picks is presented in the table that follows:
Company Basics | ||||
CY | CMI | MGA | CELG | |
Market Cap (Billion) | 2.4 | 23.03 | 10.88 | 32.58 |
Stock Performance 5 Yr | 62% | 259% | 28% | 45% |
Stock Performance 1 Yr | -26% | 17% | -8% | 37% |
Dividend Yield | 2.8% | 1.3% | 2.4% | 0.0% |
Celgene and Cummins are the well-recognized names on the list and have been strong performers over the last 5 years. CY and MGA have both declined over the last year, however, they have also offered positive returns over the last 5 years and outperformed the broader markets by a wide margin. CELG is the only non-dividend payer on the list while CY and MGA offer respectable dividend yields exceeding 2%.
To get a better understanding of these companies, I evaluated the historical growth rates of revenue, income and book value, and the projected growth rates. These are summarized in the table shown below:
Growth Rates | ||||
CY | CMI | MGA | CELG | |
Revenue | ||||
10 Year | 3% | 12% | 9% | 43% |
5 Year | -9% | 10% | 4% | 40% |
1 Year | 13% | 36% | 19% | 34% |
Income | ||||
10 Year | - | 37% | 6% | - |
5 Year | 34% | 21% | 14% | 80% |
1 Year | 121% | 78% | 5% | 50% |
EPS | ||||
10 Year | - | 34% | 4% | - |
5 Year | 29% | 22% | 12% | 74% |
1 Year | 125% | 81% | 0% | 52% |
Book Value | ||||
10 Year | -9% | 18% | 2% | 30% |
5 Year | -18% | 15% | 2% | 20% |
1 Year | -42% | 20% | 1% | -7% |
Growth Projections | ||||
Next Year | 42% | 14% | 15% | 17% |
Next 5 Year | 9% | 17% | 8% | 25% |
CELG has historically been a very strong performer and has grown its revenues and earnings at an impressive rate over the 10 year, 5 year and 1 year period. The biggest negative that I see is the decline in book value over the last year. CMI and MGA have also historically performed well. Going forward, CELG and CMI are expected to lead the way with growth rates exceeding 15%.
The next step in the fundamental analysis was the evaluation of margins and operational effectiveness of the 4 companies. The table that follows presents the evaluation results.
Averages | CY | CMI | MGA | CELG |
Gross Margins | ||||
10 Year | 45% | 21% | 13% | 88% |
5 Year | 46% | 22% | 12% | 91% |
Last Year | 55% | 25% | 12% | 91% |
TTM | 55% | 25% | 12% | 91% |
Operating Margins | ||||
10 Year | -10% | 8% | 4% | 1% |
5 Year | -12% | 10% | 2% | 11% |
Last Year | 15% | 15% | 4% | 30% |
TTM | 15% | 15% | 0% | 30% |
ROIC | ||||
10 Year | -1% | 16% | 7% | 0% |
5 Year | 2% | 20% | 6% | 2% |
Last Year | 30% | 32% | 14% | 17% |
TTM | 30% | 32% | 12% | 17% |
CY and CMI have both improved their gross margins over the years. In fact, MGA and CELG have also reported solid gross margins over the analyzed time period. CY and CMI have also generated excellent return on invested capital last year.
Having developed a good idea about the fundamentals of the 4 companies, the next step was to perform relative valuation. The multiples used in the analysis were based on historical analysis of individual company and industry multiples.
The table below presents the valuation analysis results.
Valuation | CY | CMI | MGA | CELG |
Current Yr Proj EPS | $1.22 | $11.77 | $5.29 | $5.66 |
EPS Growth Rate | 9% | 17% | 8% | 25% |
Future EPS (5 Yr) | $1.58 | $18.64 | $6.63 | $10.99 |
Expected P/E | 14 | 12.6 | 11 | 16 |
Price 5 Yrs Out | $22.12 | $234.85 | $72.96 | $175.77 |
Unlevered Beta | 2.11 | 1.1 | 1.1 | 1.27 |
Debt | 0.043 | 0.686 | 0.233 | 1.802 |
Debt to Cap | 2% | 3% | 2% | 6% |
Current Tax Rate | 35% | 35% | 35% | 35% |
Levered Beta | 2.13 | 1.12 | 1.12 | 1.32 |
Risk Free Rate | 2% | 2% | 2% | 2% |
Risk Premium | 6.00% | 8.00% | 8.00% | 8.00% |
Size Premium | 1.54% | -0.36% | 0.62% | -0.36% |
Cost of Equity | 16.3% | 10.6% | 11.5% | 12.2% |
Fair Value | $10.37 | $141.85 | $42.25 | $99.01 |
Current Price | $15.50 | $119.98 | $46.63 | $74.24 |
% Overvalued | 33% | -18% | 9% | -33% |
As shown in the table above, CMI and CELG are significantly undervalued and appear attractive at current levels. CY is grossly overvalued and is a short candidate in my opinion. MGA is modestly overvalued and I would avoid it at these levels.
Disclaimer: Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.
Disclosure: I am long CMI.
