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In last Thursday's edition of Lighting Round on his Mad Money program, Jim Cramer was bullish on Kraft (KFT), ConocoPhillips (NYSE:COP), Heckmann (HEK), Baidu (NASDAQ:BIDU) and Devon Energy (NYSE:DVN), while he was bearish on Nokia (NYSE:NOK), Newmont Mining (NYSE:NEM) and Sodastream (NASDAQ:SODA). As always, I will only be analyzing his long ideas.

As my analysis of COP and DVN was presented in recent articles, I will not be evaluating them as part of this effort. When I last analyzed COP, the stock had a fair value of $61 and traded at $77. The stock is expensive in my opinion. DVN is also overvalued trading at $77 with a fair value of $56. These analyses can be seen here and here. In this article, I will conduct relative valuation for the remaining three bullish picks and present my fair value estimates.

Basic information on KFT, HEK and BIDU is presented in the table that follows:

Company Basics

KFT

HEK

BIDU

Market Cap (Billion)

$67.86

$0.593

$47.5

Stock Performance 5 Yr

26%

-36%

1321%

Stock Performance 1 Yr

24%

-23%

13%

Dividend Yield

3.0%

0.0%

0.0%

HEK is a small cap stock, with a market capitalization of approximately $600 million. The stock has been down over the last five years. BIDU, on the other hand, has had an astronomical run with the stock up 1,321% over the same period. KFT was a steady performer gaining 26%; it is the only dividend-paying stock on the list and yields a respectable 3%.

Next, I evaluated the historical growth rates of revenue, income, and the projected growth rates. These are summarized in the table shown below:

Growth Rates

KFT

HEK

BIDU

Revenue

3 Year

9%

144%

69%

1 Year

10%

243%

92%

QOQ

7%

262%

84%

Total Income

3 Year

7%

-

89%

1 Year

-14%

-

97%

QOQ

54%

-

77%

Growth Projections

Next Year

11%

41%

41%

Next 5 Year

9%

25%

45%

HEK has reported a loss in net income during each of the last four years. The good news is that the company is expected to return to profitability this year and has a projected long-term growth rate of 25%. BIDU is accelerating its revenue growth rates. The company has consistently increased both its revenues and income at an annual rate exceeding 60%. Longer term, the company is expected to grow at an annual rate of 45%. KFT is again the steady firm in the group, with a respectable 9% historical and projected growth rate.

Having analyzed the historic and projected growth rates, I looked at the operational metrics such as margins and returns on equity and assets. These are shown below.

Gross Margins

KFT

HEK

BIDU

3 Year

38%

-

74%

Last Year

37%

-

73%

TTM

37%

-

73%

Operating Margins

3 Year

12%

-

49%

Last Year

12%

-

52%

TTM

12%

-

52%

Operations

ROE

3 Year

11%

-

39%

1 Year

10%

-

43%

ROA

3 Year

4%

-

28%

1 Year

4%

-

28%

BIDU has modestly improved its operating margins and its return on equity over the last three years. The ROA is very consistent for both KFT and BIDU. KFT has also maintained its margins over the analyzed time period.

Having developed a good idea about the fundamentals of the three 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

KFT

HEK

BIDU

Next Yr Proj EPS

$2.80

$0.24

$6.46

EPS Growth Rate

9%

25%

45%

Future EPS (5 Yr)

$3.66

$0.47

$19.62

Expected P/E

19.2

25

20

Price 5 Yrs Out

$70.26

$11.72

$392.34

Unlevered Beta

0.65

1.27

1.33

Levered Beta

0.97

1.62

1.47

Risk Free Rate

2%

2%

2%

Risk Premium

8.00%

6.00%

9.00%

Size Premium

-0.36%

2.35%

-0.36%

Cost of Equity

9.4%

14.1%

14.9%

Fair Value

$44.81

$6.07

$196.30

Current Price

$38.38

$4.68

$136.09

% Overvalued

-17%

-30%

-44%

As shown in the table above, KFT, HEK and BIDU are all significantly undervalued at current levels. KFT offers a total return potential of 20% (including dividends) and may be the safer choice in the current market conditions. HEK is slightly speculative in my opinion. However, the company does trade at a considerable discount to fair value and offers an acceptable margin of safety.

Disclaimer: Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.

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

Source: My Take On 3 Cramer Picks: Significantly Undervalued