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In recent editions of Lighting Round on his Mad Money program, Jim Cramer was bullish on Pepsi (PEP) [May 16], Tractor Supply (TSCO) and Directv (DTV) [May 15]. As these companies are a part of my watch list, I decided to quantitatively analyze these bullish picks to determine if following his advice makes sense at current levels.

PEP and DTV are large-cap stocks and have market capitalizations of approximately $106 billion and $29 billion, respectively. TSCO is the relatively unknown name on the list and is an operator of retail farm and ranch stores in the United States. The company has a market cap of $6.58 billion and pays a dividend of 0.9%. The stock has been a stellar performer during the last 1-year and 5-year periods returning 46% and 254% respectively. PEP was a laggard in this category with the stock declining 4% during the past 12 months. However, the company pays a healthy dividend yield of 3.2%. DTV fell 11% during the TTM period, but is up 92% over the past 5 years. The company currently does not pay a dividend.

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

Growth Rates

PEP

TSCO

DTV

Revenue

10 Year

10%

13%

12%

5 Year

14%

12%

13%

1 Year

15%

16%

13%

Income

10 Year

7%

19%

-

5 Year

3%

20%

13%

1 Year

2%

33%

19%

EPS

10 Year

8%

20%

-

5 Year

4%

22%

25%

1 Year

3%

34%

51%

Growth Projections

Next Year

8%

16%

22%

Next 5 Year

5%

18%

18%

DTV reported a loss during financial year 2002. Therefore, no income and EPS growth rates were calculated for the 10-year period. The company however has reported steady revenue growth rates during the past 10-, 5- and 1-year periods. During the last year, EPS growth accelerated by 51% compared with the 25% growth rate of the past 5 years. TSCO also sports healthy historical revenue, income and EPS growth rates. PEP's income and EPS growth rates show a negative trend, which is alarming in my opinion. Going forward, analysts expect an 18% growth rate from TSCO and DTV and a 5% growth rate from PEP.

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.

Margins and Operations

Averages

PEP

TSCO

DTV

Gross Margins

10 Year

54%

31%

46%

5 Year

53%

32%

49%

Last Year

53%

33%

49%

TTM

52%

33%

49%

Operating Margins

10 Year

17%

6%

7%

5 Year

16%

6%

15%

Last Year

15%

8%

17%

TTM

14%

9%

17%

Capex/Sales

10 Year

5%

4%

11%

5 Year

5%

3%

12%

Last Year

5%

4%

12%

TTM

5%

4%

12%

TSCO and DTV have both expanded their margins over the last 5 years while PEP's margins have contracted during this time period. The ration of capital expenditures to sales has however remained constant for the 3 companies, which is a positive in my opinion.

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

PEP

TSCO

DTV

Next Yr Proj EPS

$4.44

$4.32

$5.31

EPS Growth Rate

5%

18%

18%

Future EPS (5 Yr)

$5.12

$7.10

$8.65

Expected P/E

17.7

19

9

Price 5 Yrs Out

$90.61

$134.86

$77.88

Unlevered Beta

0.85

0.86

0.96

D/E Ratio

98%

0%

0%

Current Tax Rate

35%

35%

35%

Levered Beta

1.39

0.86

0.96

Risk Free Rate

2%

2%

2%

Risk Premium

6.00%

6.00%

6.00%

Size Premium

-0.36%

0.74%

-0.36%

Cost of Equity

10.0%

7.9%

7.4%

Fair Value

$57.65

$93.98

$55.48

Current Price

$67.85

$91.35

$44.45

% Overvalued

15%

-3%

-25%

As shown in the table above, DTV is significantly undervalued at current levels and offers a return potential of 25%. TSCO is fairly valued while PEP is modestly overvalued and should be avoided at current levels in my opinion. I would buy DTV, hold TSCO and sell PEP.


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: 3 Mad Money Picks From Mid-May