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Profitability is one of the most important parts of stock analysis, but how do you compare profits between companies? One idea is to use DuPont analysis on return on equity (ROE) profitability.

To illustrate, we ran a screen. We began with stocks that appear undervalued relative to both free cash flow and earnings growth, with P/FCF below 15 and PEG below 1. These are considered fair value levels for most companies, so stocks with ratios below these levels may be undervalued.

Then to analyze these companies' profitability, we ran DuPont analysis. DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components:

ROE

= (Net Profit/Equity)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

Because increases in net margin and asset turnover are considered good things, DuPont focuses on companies with these positive characteristics: Increasing ROE along with,

•Decreasing leverage, (i.e. decreasing Asset/Equity ratio)

•Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Those companies that pass DuPont are seeing positive trends in the sources of their increasing profitability, which adds further weight to the idea that the names are profitable.

Interactive Chart: Press Play to compare changes in market cap over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

Do you think these stocks should be trading higher? Use this list as a starting point for your own analysis.

List sorted by PEG.

1. Nacco Industries Inc. (NC): Engages in lift trucks, small appliances, specialty retail, and mining businesses primarily in the Americas, Europe, and the Asia-Pacific. Market cap at $948.07M, most recent closing price at $111.95. PEG at 0.27. P/FCF at 9.41. MRQ net profit margin at 5.72% vs. 4.43% y/y. MRQ sales/assets at 0.528 vs. 0.522 y/y. MRQ assets/equity at 3.126 vs. 3.707 y/y.

2. TPC Group Inc (TPCG): Produces specialized lines of chemical products to chemical and petroleum based companies worldwide. Market cap at $649.32M, most recent closing price at $41.91. PEG at 0.63. P/FCF at 9.78. MRQ net profit margin at 2.97% vs. 2.05% y/y. MRQ sales/assets at 0.571 vs. 0.565 y/y. MRQ assets/equity at 3.454 vs. 3.641 y/y.

3. Universal Health Services Inc. (UHS): Operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. Market cap at $4.1B, most recent closing price at $42.15. PEG at 0.63. P/FCF at 14.49. MRQ net profit margin at 7.05% vs. 6.5% y/y. MRQ sales/assets at 0.235 vs. 0.231 y/y. MRQ assets/equity at 3.207 vs. 3.635 y/y.

4. Advance America, Cash Advance Centers Inc. (AEA): Provides cash advance services in the United States, the United Kingdom, and Canada. Market cap at $657.93M, most recent closing price at $10.50. PEG at 0.64. P/FCF at 4.17. MRQ net profit margin at 14.54% vs. 9.83% y/y. MRQ sales/assets at 0.375 vs. 0.371 y/y. MRQ assets/equity at 1.684 vs. 1.836 y/y.

5. Community Health Systems, Inc. (CYH): Provides healthcare services through the operation of hospitals in the United States. Market cap at $2.27B, most recent closing price at $24.53. PEG at 0.73. P/FCF at 4.68. MRQ net profit margin at 1.99% vs. 1.83% y/y. MRQ sales/assets at 0.239 vs. 0.228 y/y. MRQ assets/equity at 6.363 vs. 6.368 y/y.

6. CF Industries Holdings, Inc. (CF): Manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide. Market cap at $13.13B, most recent closing price at $199.92. PEG at 0.74. P/FCF at 7.45. MRQ net profit margin at 25.54% vs. 16.18% y/y. MRQ sales/assets at 0.191 vs. 0.141 y/y. MRQ assets/equity at 1.974 vs. 2.161 y/y.

7. Portfolio Recovery Associates Inc. (PRAA): Provides outsourced receivables management and related services in the U. Market cap at $1.15B, most recent closing price at $66.96. PEG at 0.8. P/FCF at 7.03. MRQ net profit margin at 22.52% vs. 20.49% y/y. MRQ sales/assets at 0.11 vs. 0.101 y/y. MRQ assets/equity at 1.799 vs. 2.03 y/y.

8. Providence Service Corp. (PRSC): Provides and manages government sponsored social services and non-emergency transportation services. Market cap at $177.85M, most recent closing price at $13.51. PEG at 0.81. P/FCF at 9.01. MRQ net profit margin at 2.32% vs. 1.97% y/y. MRQ sales/assets at 0.645 vs. 0.567 y/y. MRQ assets/equity at 3.714 vs. 4.731 y/y.

9. Symetra Financial Corporation (SYA): Operates as a financial services company in the life insurance industry in the United States. Market cap at $1.44B, most recent closing price at $12.01. PEG at 0.87. P/FCF at 1.6. MRQ net profit margin at 13.89% vs. 10.89% y/y. MRQ sales/assets at 0.019 vs. 0.019 y/y. MRQ assets/equity at 9.048 vs. 10.869 y/y.

10. HFF, Inc. (HF): Provides commercial real estate and capital markets services to the commercial real estate industry in the United States. Market cap at $562.14M, most recent closing price at $15.44. PEG at 0.92. P/FCF at 7.84. MRQ net profit margin at 16.67% vs. 8.75% y/y. MRQ sales/assets at 0.159 vs. 0.147 y/y. MRQ assets/equity at 3.772 vs. 3.904 y/y.

11. Protective Life Corp. (PL): Engages in the production, distribution, and administration of insurance and investment products in the United States. Market cap at $2.62B, most recent closing price at $28.91. PEG at 0.93. P/FCF at 4.76. MRQ net profit margin at 10.13% vs. 9.94% y/y. MRQ sales/assets at 0.017 vs. 0.017 y/y. MRQ assets/equity at 12.542 vs. 14.278 y/y.

12. Einstein Noah Restaurant Group, Inc. (BAGL): Operates, franchises, and licenses bagel specialty restaurants in the United States. Market cap at $237.84M, most recent closing price at $14.04. PEG at 0.99. P/FCF at 14.26. MRQ net profit margin at 5.32% vs. 3.16% y/y. MRQ sales/assets at 0.562 vs. 0.517 y/y. MRQ assets/equity at 2.332 vs. 2.65 y/y.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

Source: 12 Highly Undervalued Stocks With Strong Sources Of Profitability