7 Large Caps With Disciplined Earnings, Trading Below Fair Value

Includes: APA, AU, AZN, CEO, CF, TECK, WU
by: ZetaKap

A large cap company with room for growth might sound like an oxymoron, but the truth is that large cap companies have not gotten to where they are by wasting their resources. These companies have grown large due to smart innovations, steady profits, and a deep understanding of their core value propositions. Today we focused on large caps that have strong track records of profitability, yet that look undervalued when examined from a price-multiple standpoint. If these kinds of companies appeal to you as an investor, then you'll probably like the list we came up with today.

The Net Margin is a profitability metric that illustrates, by percentage, how much of every dollar earned gets turned into a bottom line profit. This is just one of many profitability metrics used by investors and analysts to better understand what the company is being left with at the end of the day. Generally, a firm that can expand its net profit margins over a period of time will see its stock price rise as well due to the trend of increasing profitability.

Net Margin = Net Income/Total Revenue

EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. EPS growth rates help investors identify stocks that are increasing or decreasing in profitability. This profitability metric is generally a key driver in the price of the stock as it directly correlates to the profitability of the company as a whole.

The forward P/E is a price multiple valuation metric, which is similar to the current P/E ratio, except that it uses the forecasted earnings instead. While this number might not be as accurate because it uses "forecasted" numbers, it does offer the benefit of illustrating analysts' expectations of a firm. If the market believes that earnings will grow moving forward, then the forward P/E should be lower than the current P/E. Financial Leverage, also known as the Equity Multiplier, illustrates how a firm is financing its assets. The lower the number the more a firm is financing its assets internally through stockholder equity. The higher this metric is the more the firm is relying on debt to finance its assets.

The Price/Earnings ratio is one of the most commonly used price-multiple metrics. Often, EPS from the last four quarters is used to derive this number. A firm that has a high P/E ratio generally indicates that investors have high expectations of the firm relative to future earnings growth. By the opposite token, investors generally have lower expectations of a firm with a low P/E ratio. A firm that holds a P/E below 10 could be viewed as having "value investment" potential. One thing to remember is that EPS is an accounting measure that could be potentially manipulated. Thus the P/E is only as good as the quality of the earnings.

We first looked for large cap stocks. We then looked for companies with strong profitability (Net Margin [TTM] >10%)(1-year fiscal EPS growth rate>10%). We then looked for companies with a low price-multiple premium (forward P/E<10)(P/E<10). We did not screen out any sectors.

Do you think these large-cap stocks will break through to new highs? Use this list as a starting-off point for your own analysis.

1) AstraZeneca PLC (AZN)

Sector: Healthcare
Industry: Drug Manufacturers - Major
Market Cap: $56.92B
Beta: 0.64
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AstraZeneca PLC has a Net Margin of 26.78%, a Earnings Per Share Growth Rate of 31.13%, a Forward Price/Earnings Ratio of 7.41, and a Price/Earnings Ratio of 6.98. The short interest was 0.12% as of 07/08/2012. AstraZeneca PLC engages in the discovery, development, and commercialization of prescription medicines for gastrointestinal, cardiovascular, neuroscience, respiratory and inflammation, oncology, and infectious diseases worldwide. Its principal products include Atacand for hypertension and heart failure; Crestor for managing cholesterol levels; Nexium for acid reflux; Losec/Prilosec for the treatment of acid related diseases; Seloken/Toprol-XL for hypertension, heart failure, and angina; Seroquel IR for schizophrenia and bipolar disorders; and Seroquel XR for schizophrenia, bipolar disorder, and major depressive disorders. The company principal products also comprise Symbicort for asthma and chronic obstructive pulmonary diseases; Synagis for RSV, a respiratory infection in infants; and Zoladex for prostate and breast cancer.

2) CNOOC Ltd. (CEO)

Sector: Basic Materials
Industry: Independent Oil & Gas
Market Cap: $88.22B
Beta: 1.47
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CNOOC Ltd. has a Net Margin of 29.16%, a Earnings Per Share Growth Rate of 29.03%, a Forward Price/Earnings Ratio of 7.33, and a Price/Earnings Ratio of 8.03. The short interest was 0.28% as of 07/08/2012. CNOOC Limited, through its subsidiaries, engages in the exploration, development, production, and sale of crude oil, natural gas, and other petroleum products. Its oil and natural gas properties are located in offshore China, which include Bohai Bay, western South China Sea, eastern South China Sea, and East China Sea, as well as in Indonesia, Iraq, other regions in Asia, Australia, Nigeria, Uganda, the United States of America, Canada, and Argentina. As of December 31, 2011, the company had net proved reserves of approximately 3.19 billion barrels-of-oil equivalent.

3) Teck Resources Limited (TCK)

Sector: Basic Materials
Industry: Industrial Metals & Minerals
Market Cap: $18.36B
Beta: 3.45
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Teck Resources Limited has a Net Margin of 21.56%, a Earnings Per Share Growth Rate of 46.42%, a Forward Price/Earnings Ratio of 7.74, and a Price/Earnings Ratio of 7.80. The short interest was 0.87% as of 07/08/2012. Teck Resources Limited operates as a diversified mining, mineral processing, and metallurgical company. It is involved in exploring, developing, smelting, refining, safety, environmental protecting, product stewardship, recycling, and researching activities. The company offers zinc and lead concentrates, and copper and molybdenum concentrates; zinc and lead, and alloys in a range of compositions and shapes; specialty metals, such as germanium, indium, and cadmium; and precious metals, including refined silver and gold dore.

4) AngloGold Ashanti Ltd. (AU)

Sector: Basic Materials
Industry: Gold
Market Cap: $12.71B
Beta: 0.58
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AngloGold Ashanti Ltd. has a Net Margin of 28.13%, a Earnings Per Share Growth Rate of 1601.49%, a Forward Price/Earnings Ratio of 8.42, and a Price/Earnings Ratio of 7.49. The short interest was 0.81% as of 07/08/2012. AngloGold Ashanti Limited primarily engages in the exploration and production of gold. It also produces by-products, such as silver, uranium oxide, and sulfuric acid. The company conducts gold-mining operations in South Africa; continental Africa, including Ghana, Guinea, Mali, Namibia, and Tanzania; Australia; and the Americas, which include Argentina, Brazil, and the United States. AngloGold Ashanti Limited, formerly known as Vaal Reefs Exploration and Mining Company Limited, was founded in 1944 and is headquartered in Johannesburg, South Africa.

5) CF Industries Holdings, Inc. (CF)

Sector: Basic Materials
Industry: Agricultural Chemicals
Market Cap: $12.88B
Beta: 1.18
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CF Industries Holdings, Inc. has a Net Margin of 28.35%, a Earnings Per Share Growth Rate of 311.81%, a Forward Price/Earnings Ratio of 9.50, and a Price/Earnings Ratio of 8.28. The short interest was 2.48% as of 07/08/2012. CF Industries Holdings, Inc., through its subsidiary, CF Industries, Inc., manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide. It operates in two segments, Nitrogen and Phosphate.

6) Western Union Co. (WU)

Sector: Services
Industry: Business Services
Market Cap: $10.32B
Beta: 1.40
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Western Union Co. has a Net Margin of 21.47%, a Earnings Per Share Growth Rate of 35.09%, a Forward Price/Earnings Ratio of 8.72, and a Price/Earnings Ratio of 8.77. The short interest was 1.36% as of 07/08/2012. The Western Union Company provides money movement and payment services worldwide. The company operates in two segments, Consumer-to-Consumer and Global Business Payments. The Consumer-to-Consumer segment offers money transfer services, including walk-in money transfer, online money transfer, account based money transfer, and mobile money transfer through a network of third-party agents using multi-currency and real-time money transfer processing systems. The Global Business Payments segment provides business-to-business payment solutions for cross-border and cross-currency transactions, as well as Travelex global business payments services through phone and Internet; services that allow consumers to send funds to businesses and government agencies using cash and debit cards; and Quick Cash, a cash disbursement service for businesses and government agencies to send money to employees or individuals.

7) Apache Corp. (APA)

Sector: Basic Materials
Industry: Independent Oil & Gas
Market Cap: $33.43B
Beta: 1.35
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Apache Corp. has a Net Margin of 24.27%, a Earnings Per Share Growth Rate of 35.69%, a Forward Price/Earnings Ratio of 6.82, and a Price/Earnings Ratio of 8.03. The short interest was 1.30% as of 07/08/2012. Apache Corporation, an independent energy company, explores for, develops, and produces natural gas, crude oil, and natural gas liquids. It has exploration and production interests in the Permian, Central, Gulf of Mexico Shelf, Gulf of Mexico Deepwater, and Gulf Coast Onshore in the United States; British Columbia, Alberta, and Saskatchewan provinces in Canada; Egypt; offshore Western Australia in the Carnarvon basin; offshore the United Kingdom in the North Sea; and in the Neuqun, Rio Negro, Tierra del Fuego, and Mendoza provinces of Argentina. The company sells its natural gas to local distribution companies, utilities, end-users, integrated oil companies, and supply aggregators and marketers. As of December 31, 2011, it had total estimated proved reserves of 1,370 million barrels of oil of crude oil, condensate, and NGLs.

*Company profiles were sourced from Finviz.

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