In addition to my recent post about significantly undervalued mining companies with forward P/E ratios of only five (big heavyweight names at the source of growth), I have prepared a short piece about two primary commodity producers that exhibit interesting operational metrics and are cheaply valued at the same time.
Potash (POT)
The Potash Corporation of Saskatchewan Inc. operates in the agricultural/chemical field and is the world's largest potash producer. In addition to its core operations in potash, POT has strong exposure to phosphate and nitrogen. What particularly attracts me about POT is its dominating world-wide supply position in its core segment potash. The company has an enterprise value of $37 billion of which only $4.7 billion is debt (market cap of $32.3 billion) and $7.81 billion in revenue. Despite being lowly leveraged, POT achieved a remarkable return on equity of 36.55% in 2011. Both operating margins with 48% and net profit margin with 34% remained very healthy.
The company currently trades at around $38 a share with a 2013 mean analyst EPS estimate of $3.83 bringing the forward P/E to only 10. Investors can pick up a 1.47% dividend yield, which should not be relevant at all as POT has better use of its cash within the company based on its high RoE. The 52-week trading range is $36.73-62.60 making POT trade at the lower end (good sign for me as a value investor). I have a price target of $60 on the stock based on a multiple of 15 and an EPS estimate of $4 for 2013.
ConocoPhillips (COP)
COP is a U.S. multinational energy company operating in the field of oil and natural gas. The company is vertically integrated and engaged in all aspects of the value chain from exploration, production, refining, transportation to marketing of its primary energy inputs oil and natural gas on a global basis. ConocoPhillips has a market capitalization of $68.4 billion and revenue of $251 billion. With a gross margin of 14% and a net profit margin of 5% the company achieved modest results. What I particularly like about COP is its global reach, strong cashflow, strategically located worldwide assets and, yet, a cheap valuation for a Fortune 500 company.
COP currently trades at $54 with a 52-week trading range of $50.62-$80.13. Most commodity producers I have written about are trading at the lower bound of their respective 52-week trading range, which in my opinion reflects a general skepticism of the investing public toward stocks rather than any particular noteworthy unsystematic risk. As I have said before, I like when a company trades at its 52-week low as it usually marked a good entry point for me when uncertainty and skepticism dominated the headlines. COP is a Fortune 500 company that is currently valued only at 8.16x forward earnings and has a dividend yield of 4.88%. I hold a buy rating on COP with a price target of $75, which marks an upside of around 40%.
Conclusion
I basically consider both stocks buys at these valuation levels. If I had to chose between the two above mentioned companies I would go with POT as the valuation discounts its strong profitability, its growth prospects and POT's dominant position in its core market potash.
Disclosure: I am long POT.
