3 Mid-Cap Stocks With Attractive Valuations

Includes: AA, ALK, KEX
by: Efsinvestment

By Ahmed Ishtiaq

Mid-cap stocks can be a valuable addition to a portfolio, as most of these stocks offer a great opportunity to achieve phenomenal growth. Mid-cap stocks can also be a great way to diversify a portfolio. These stocks combine the benefits of small-cap and large-cap stocks. Usually mid-cap companies have experienced management, sophisticated technology and a broad market presence. Mid-cap stocks usually have lower risk than their small-cap counterparts and more growth opportunities than large-cap companies. Another advantage of investing in mid-cap companies is the prospect of an acquisition. Sometimes large-cap companies acquire mid-cap companies to achieve growth, increase market share or gain economies of scale.

Historically, mid-cap stocksy have produced higher returns than large-cap stocks and almost as high as small-cap returns, with only slightly more volatility than large-cap stocks. In other words, mid-cap stocks have historically offered a favorable risk/reward tradeoff versus both large and small-cap stocks. We decided to choose three mid-Cap stocks with massive growth potential and attractive multiples. These stocks have shown remarkable EPS and revenue growth over the years, and we expect the growth to continue in the coming year. These stocks have low debt levels and earnings are expected to grow at more than 10%.

Alcoa. Inc.

Alcoa, Inc. (NYSE:AA) is the largest player in the global aluminum market, producing 20% of the world's alumina and 10% of its aluminum. The company is involved in bauxite mining; alumina refining; aluminum smelting; and producing aluminum products such as beverage cans, aerospace components, and auto and building products. The company has operations on every continent and has been actively expanding its operations in lower-cost regions such as South America and the Middle East.

  • Alcoa has shown remarkable revenue growth over the years. At the end of 2009, the company reported revenues of $18.44 billion, which grew to $24.9 billion by the end of 2011. During the trailing twelve months, the company has recorded revenue of $23.7 billion.
  • Alcoa has been able to grow EPS at an average rate of 27% over the past three years. The growth in EPS is expected to be over 10% for the company in the next five years.
  • At the moment, the company has total long-term debt of $8.6 billion, and a debt-to-equity ratio of 0.6. In addition, the stock is trading at an attractive forward P/E ratio of 10.6.
  • Despite heavy capital expenditures, Alcoa has impressive free cash flows. The company has been generating positive free cash flows during the past three years. Recent capital expenditures have set the company up nicely for future growth. At the moment, the company has $0.80 of free cash flows per share.
  • Alcoa does everything from the mining, refining, smelting, and recycling of aluminum. Due to control on different levels of its supply chain, the company is able to achieve better synergies. As a result, Alcoa has been able to perform well where its competitors have suffered.

  • At the moment, demand for aluminum is increasing due to a slight recovery in the global economy. It is expected that the global demand for aluminum will reach 71.2 million tons by 2018. China is one of the biggest markets for aluminum. However, China does not have the resources to be an important competitor on the aluminum production market. Chinese smelters use coal, which is more expensive and polluting -- while smelters in other countries use cheaper and cleaner hydropower.

  • Alcoa will be able to take advantage of increasing demand, as it is the biggest player in the market. Despite low prices, aluminum demand was on the rise during 2012, and the trend is expected to continue. The auto and aerospace industries are driving the demand for aluminum, which may increase as much as 10% over the next five years on buying from Asia. We expect Alcoa to continue solid revenue and cash flow growth during 2013.

Kirby Corp.

Kirby Corp. (NYSE:KEX) operates the largest fleet of tank barges on the U.S. inland waterway system, and derives 65% of revenue from the segment. Since its incorporation in 1969, the firm has built its market-leading position by acquiring independent marine operators and shipper-owned fleets.

  • Kirby's revenue has been growing at a phenomenal rate over the past three years. At the end of 2009, the company generated $1.08 billion in revenues, which grew to $1.85 billion by the end of 2011. Revenue growth has continued over the last twelve months, and TTM revenues stand at $2.15 billion.
  • The company has shown an average EPS growth of about 20% over the past three years, and it is expected to grow at over 10% for the next five years.
  • Kirby has long-term debt of $763 million at the moment, and a debt-to-equity ratio of 0.5. Kirby's debt-to-equity ratio is substantially lower than the industry average of 4.4.
  • Cash flows are incredibly strong for the company. Operating cash flows are growing at an impressive rate for Kirby and currently stand at $343 million, much higher than the $245 million reported a year earlier. In addition, the company has reported positive free cash flows in each of the previous four years.
  • Currently, the stock is trading at an attractive forward P/E ratio of 13.5.
  • Kirby has a niche, and it is the largest operator of tank barges in the country. It transports bulk liquid products inland throughout the Mississippi River system and the Gulf Intracoastal Waterway. It also transports dry-bulk commodities along the Gulf of Mexico coast. Recently, the company has started transporting crude oil from the Bakken shale area to refineries and refined products such as gasoline back from refineries. Major players in the oil and gas industry are focusing on increased drilling for liquids in the shale plays, which will provide a solid revenue driver for the company. As a result, we expect the company to continue its growth over the next year.

Alaska Air Group, Inc.

Annually, Alaska Air Group (NYSE:ALK) offers 23 million passengers service to more than 90 destinations along the West Coast, Mexico, and Canada. Alaska Airlines, its major airline, operates a 114 all-jet fleet, while Horizon Air, its regional airline, flies 54 turboprop and jet aircraft. The firm earns ancillary revenue by providing freight and mail services. Alaska employs 12,000 workers and generates about $4 billion in annual revenue.

  • Revenue growth has been impressive for the company, however, slightly less impressive than the two companies mentioned above. ALK reported revenues of $3.4 billion at the end of 2009 and $4.3 billion at the end of last year. Average revenue growth over the past three years has been 5.8% for the company.
  • EPS growth has been remarkable for the company over the past three years. ALK has been able to grow its EPS at around 22% over the last year.
  • The forward P/E estimate for ALK is 7.4, and the stock has an extremely attractive PEG of 0.58.
  • The company has long-term debt of just $1.099 billion, and a debt-to-equity ratio of 0.6. ALK's debt-to-equity ratio is considerably lower than the industry average of 2.4.
  • Cash flows are growing at a steady rate for Alaska Air Group. Operating cash flows at the end of last year stood at $696 million and $725 million for the trailing twelve months. In addition, free cash flows were $309 million at the end of 2011 and $292 million for the last twelve months.
  • Alaska Air Group has strong earnings momentum, however, its P/E ratio is still remarkably low. We believe the earnings momentum will continue, and Alaska Air Group will prove to be an astute investment at the current level of multiples.

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

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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