Seeking Alpha
Long only, deep value, contrarian, growth at reasonable price
Profile| Send Message|
( followers)  

In recent editions of Lighting Round on his Mad Money program, Jim Cramer was bullish on several stocks that I closely follow. I have selected three such stocks for further analysis to determine if following Cramer's recommendation makes sense at current levels. The selected companies are Consolidated Edison, Inc. (NYSE:ED), Devon Energy Corp (NYSE:DVN) and Becton, Dickson and Co. (NYSE:BDX). ED and BDX have very similar market capitalization of approximately $17 billion while DVN is the larger firm on the list with a market capitalization of $27 billion. The stocks all pay dividends with ED, a utility company, not surprisingly leading the way with a yield of 4.2%.

During the last five years, ED is the only company on the list that has generated positive returns for its shareholders (not counting dividends). BDX and DVN have declined by 3% and 12%, respectively.

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

Growth Rates

ED

DVN

BDX

Revenue

3 Year

-2%

-9%

3%

1 Year

-3%

15%

6%

QOQ

-6%

21%

2%

Total Income

3 Year

-4%

N/A

4%

1 Year

6%

3%

-4%

QOQ

-18%

-10%

-17%

Growth Projections

Next Year

3%

14%

10%

Next 5 Year

3%

10%

8%

The growth rates are a mixed bag with none of the firms standing out. DVN did increase its revenue by 15% last year and is expected to grow at a very respectable growth rate of 10% during the next five years. BDX is also not too far behind with a projected 8% growth rate. ED appears to be a mature company with a projected long-term growth rate of 3%.

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

Operations

Averages

ROE

3 Year

9%

15%

25%

1 Year

9%

22%

26%

ROA

3 Year

3%

6%

13%

1 Year

3%

11%

12%

DVN and BDX have generated impressive returns on equity and assets over the last three-year and one-year period. DVN in particular shows improving fundamentals with ROE averages climbing from 15% to 22%. ED's 3% ROA and 9% ROE is low in my opinion.

Having developed a good idea about the fundamentals of the 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

ED

DVN

BDX

Next Yr Proj EPS

$3.85

$7.13

$6.20

EPS Growth Rate

3%

10%

8%

Future EPS (5 Yr)

$4.19

$9.41

$7.77

Expected P/E

14.4

13

14

Price 5 Yrs Out

$60.38

$122.36

$108.83

Unlevered Beta

0.5

1

1.13

Debt to Equity

92%

46%

88%

Current Tax Rate

35%

35%

35%

Levered Beta

0.80

1.30

1.78

Risk Free Rate

2%

2%

2%

Risk Premium

6.00%

6.00%

6.00%

Size Premium

0.62%

-0.36%

0.62%

Cost of Equity

7.4%

9.4%

13.3%

Fair Value

$42.22

$77.96

$58.35

Current Price

$58.60

$65.21

$76.39

% Overvalued

28%

-20%

24%

As shown in the table above, ED and BDX are significantly overvalued while DVN is grossly undervalued at current levels. As mentioned earlier, DVN also exhibits improving fundamentals and has the characteristics of a good investment. Based on the analysis presented above, I would buy DVN and sell ED and BDX.


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

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

Source: Cramer's Picks: 1 To Buy, 2 To Sell