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Materials stocks in NYSE have been evaluated by three different fundamental metrics:

  • PE Ratio multiples
  • Discount Earnings model
  • GY2PE

Price to earnings ratio is the most commonly used investment metric. The assessment of relative changes in PE ratio over the course of time highlights the low and high multiples investors are willing to pay for the current and future earnings of a company. Most investors would like to compare the current PE of the company with its historical averages. Comparing a company's current P/E ratio with benchmarks such as its historical P/E average can help a value investor determine if the stock is cheap, fully valued or overpriced. We identified the top 6 Materials stocks trading below or near the average of its yearly low P/E for the last 5 years. These securities are pretty undervalued compared to other securities in the sector.

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, 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.

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

Mechel OAO (MTL): Mechel OAO 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.The company has a Return on Assets (ROA) of 4.5% and a Return on Equity (ROE) of 15.0%. The stock is trading with a Return on Invested Capital (ROIC) of 5.8%. The stock is expected to earn $1.93 per share next year. MTL is expected to grow at 15.01% over the next 5 years. The average of the minimum forward price to earnings multiples over the last 5 years for the company is 4.78 and the average price to earnings multiples in the same period is 12.52. MTL is valued at $9.2 using the minimum earnings multiples and $24.0 using the average earnings multiples over the last 5 years. The company is valued at $24.6 using the Discount Earnings Model(DEM). The company has a sum of growth and yield to PE ratio (GY2PE) of 2.76. MTL is currently trading at $10.43, raising $1.4 or 15% this year.

Barrick Gold Corp. (ABX): Barrick Gold Corporation 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 stock has a ROA of 11% and a ROE of 19.2%. ABX is trading with a ROIC of 13.9%. The stock is expected to earn $6.03 per share next year. The stock is expected to grow at 28.94% over the next 5 years. The average of the minimum forward price to earnings multiples over the last 5 years for the company is 7.14 and the average price to earnings multiples in the same period is 8.62. The company is valued at $67.5 using the minimum earnings multiples and $81.5 using the average earnings multiples over the last 5 years. The company is valued at $100.5 using DEM. The company has a GY2PE of 3.84. ABX is currently trading at $43.63, falling $3.9 or 8.2% this year.

ArcelorMittal (MT): ArcelorMittal 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%. MT is trading with a ROIC of 3.4%. The stock is expected to earn $3.22 per share next year. The company is expected to grow at 15.84% over the next 5 years. The average of the minimum forward price to earnings multiples over the last 5 years for the company is 9.94 and the average price to earnings multiples in the same period is 17.72. MT is valued at $32.7 using the minimum earnings multiples and $58.3 using the average earnings multiples over the last 5 years. MT is valued at $40.6 using DEM. The company has a GY2PE of 2.51. MT is currently trading at $20.40, raising $0.63 or 3.2% this year.

Huntsman Corp. (HUN): Huntsman Corporation 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. The company has a ROA of 0.3% and a ROE of 1.5%. The company is trading with a ROIC of .5%. The company is expected to earn $2.13 per share next year. The company is expected to grow at 14.38% over the next 5 years. The average of the minimum forward price to earnings multiples over the last 5 years for the company is 8.23 and the average price to earnings multiples in the same period is 22.86. HUN is valued at $17.0 using the minimum earnings multiples and $47.3 using the average earnings multiples over the last 5 years. The company is valued at $26.5 using DEM. The company has a GY2PE of 2.35. HUN is currently trading at $14.40, raising $4.4 or 45% this year.

Intrepid Potash Inc. (IPI):Intrepid Potash Inc. is a producer of muriate of potash in the United States. Interpid engages in the production and marketing of potash and langbeinite (sulfate of potash magnesia), and other minerals containing potassium, magnesium, and sulfate. The company has a ROA of 5.7% and a ROE of 6.2%. IPI is trading with a ROIC of 6.2%. The company is expected to earn $1.90 per share next year. The company is expected to grow at 48.58% over the next 5 years. The average of the minimum forward price to earnings multiples over the last 5 years for the company is 13.66 and the average price to earnings multiples in the same period is 25.50. The company is valued at $71.8 using the minimum earnings multiples and $133.9 using the average earnings multiples over the last 5 years. The stock is valued at $45.5 using DEM. The company has a GY2PE of 3.40. IPI is currently trading at $24.92, raising $1.5 or 6.5% this year.

Arch Coal Inc. (ACI): Arch Coal, Inc. engages in the production and sale of steam and metallurgical coal from surface and underground mines located in the United States. The stock has a ROA of 3.3% and a ROE of 7.3%. The company is trading with a ROIC of 3.8%. The company is expected to earn $1.29 per share next year. The stock is expected to grow at 19.89% over the next 5 years. The average of the minimum forward price to earnings multiples over the last 5 years for the company is 18.39 and the average price to earnings multiples in the same period is 47.70. ACI is valued at $27.8 using the minimum earnings multiples and $72.1 using the average earnings multiples over the last 5 years. The stock is valued at $17.8 using DEM. The company has a GY2PE of 2.17. ACI is currently trading at $12.06, falling $3.2 or 21% this year.

Source: 6 Fundamentally Undervalued Materials Stocks