7 Under-the-Radar Companies Whose Earnings Could Jump

by: NakedValue

Some of the best investment opportunities are found among overlooked stocks. The problem is often caused by a poor first impression on investors. With so many stocks in the investable universe, investors will often run screens or spend a small amount of time looking at potential investments. When a low margin company like Pilgrim's Pride (NYSE:PPC) trades with a trailing P/E of around 70, this will certainly chase away investors. When a company with a print business like R.R Donnelly & Sons (NASDAQ:RRD) trades with a trailing P/E of around 20, market investors will also certainly lose interest.

But the below list of stocks are worth an additional look. They are not high profile names but they could be at an inflection point. Not only are their earnings expected to growth meaningfully in the near term, they could face other positive catalysts.

James River Coal Company (JRCC)
Trailing P/E: 31.74
Forward P/E: 7.94

The coal miner recently doubled its size through an acquisition of International Resource Partners and Logan & Kanawha Coal Company from Magnetar Capital at valuations below industry averages at the time. At the time of the deal, we discussed the significant upside to JRCC stock following the acquisition.

Not only was this merger done at a reasonable price, we believe that the company should continue to reap benefits through synergies, either through additional revenue opportunities or improved cost structure. Following completion of the deal, James River will add a largely non-union workforce, 24 customers in eight countries, minimal metallurgical coal contracts past 2012 (very bullish for coal price bulls) and possible margin expansion.

Pilgrim's Pride (PPC)
Trailing P/E: 70.16
Forward P/E: 7.65

The company produces a broad array of chicken products in the U.S., México and Puerto Rico. It produced $6.9 billion of revenues in 2010 and processed 7.7 billion pounds of chicken products. Pilgrim's Pride has the capacity to process 10.3 billion pounds of chicken annually.

The company should continue to grow revenues as its production increases towards capacity. There are headwinds though. As corn and soybean prices continue to rise, Pilgrim's Pride will face margin pressures. Corn represents 65% of feed costs and soybean represents 24% of feed costs.

In addition to the company's growing earnings, there is another possible medium term catalyst: JBS USA owns 67.3% of the total outstanding shares. With former CEO Don Jackson resigning to join JBS USA, this leaves open the real possibility that Pilgrim's Pride could be a buyout target down the road.

Meritor, Inc (NYSE:MTOR)
Trailing P/E: 95.03
Forward P/E: 6.52

The company is an original equipment manufacturer of truck and specialty vehicle parts. The company could face headwinds from a slowing economy and rising input costs but it will likely benefit greatly from any additional rebound in demand because of its financial leverage. At the same time, any stumble along the way could have a disproportionately negative effect on shareholders. At the worst of the March 2009 lows, the stock traded at less than $0.50 per share. In March 2010, the company offered 19,952,500 million shares at $10.50 per share. If the company is forced to raise capital again, it could dilute existing shareholders.

Greenhill Advisors and Glenview Capital Management are among the company's largest shareholders. While management and directors have a relatively modest 1.6% interest in the company, management has meaningful incentive to search for stock upside because of potential payments if there is a change of control. In the case of CEO Charles G McClure Jr., he stands to reap $26.919 million if he is terminated following a change of control. This is a meaningful amount compared to his 2010 total compensation of $7,606,508.

CBL & Associates Properties (NYSE:CBL)
Trailing P/E: 43.88
Forward P/E: 8.56

This real estate investment trust was founded in 1978. As of December 31, 2010, the REIT had controlling interests in 76 regional malls, 30 associated centers, eight community centers and 14 office buildings. CBL's commercial properties' top five markets by revenues include: St. Louis, Nashville, Kansas City, Madison and Chattanooga. Top tenants include Limited Brands (LTD), Foot Locker (NYSE:FL), Abercrombie & Fitch (NYSE:ANF), The Gap (NYSE:GPS) and AE Outfitters Retail (NYSE:AEO).

Revenues have been stable. Even during the financial crisis, revenues dropped modestly. While the stock has rebounded sharply from the March 2009 lows of around $2 per share, they are still well below the 2007 peak of around $50. While the company is still exposed to risks going forward, generally speaking the worst of the real estate crisis is in the rear view mirror. While the economy and real estate market will likely recover slowly, this should still bode well for CBL at these valuations.

Take-Two Interactive (NASDAQ:TTWO)
Trailing P/E: 28.39
Forward P/E: 6.61

The New York-based video game maker includes the following game franchises, Grand Theft Auto, Max Payne, Bioshock and various 2K sports franchises. The nature of the business makes earnings and revenues volatile. During periods of hit games, revenues soar and during lulls in gaming, revenues can fall off sharply. The company's long-anticipated Duke Nukem Forever games have faced mixed reviews but the games could provide some upside potential to the stock price. In addition, L.A Noire and The Darkness II will likely face 2011 release.

The video game maker is subject to customer concentration. As of March 31, 2011, the five largest customers accounted for 43.8% of net revenues. GameStop (NYSE:GME) accounted for 19.2% and Wal-Mart (NYSE:WMT) accounted for 10.8%, respectively. The company's NBA 2K franchise faces risks from a NBA lockup.

International sales are a large contribution to total sales. In the fiscal year ending March 31, 2011, about 44% of the company's revenues were international, mainly from Europe. Shareholders may find solace in knowing that their interests should be well guarded by fellow shareholder Carl Icahn.

Dover Downs Gaming & Entertainment (NYSE:DDE)
Trailing P/E: 21.32
Forward P/E: 9.97

The Delaware-based gaming and entertainment company operates the Dover Downs Casino, the Dover Downs Hotel and Conference Center and Dover Downs Raceway. The company's earnings are expected to grow, but long term opportunities could be limited by regulatory pressures and limited demand. Near term, the company expects to grow by better utilizing the casino space with table games, increasing hotel occupancy with additional destination quality live entertainment, and management agreements with underutilized properties.

In 2010, the company reduced the quarterly dividend from $0.05 to $0.03 per share. Any increase in the dividend would be a very positive signal to shareholders. In addition, gaming revenues have increased following the introduction of table game operations including 40 tables for blackjack, poker, craps and roulette. The benefits of this new casino space optimization could continue to provide revenue tailwinds.

R.R. Donnelley & Sons Company (RRD)
Trailing P/E: 20.44
Forward P/E: 8.85

The Chicago-based print, logistics and business services company continues to reinvent itself as its industry undergoes change. While the company has moved to diversify and transform its business, 75% of 2010 net sales came from U.S. print and related services. The segment's revenues actually increased from 2009 to 2010 because of logistics growth and positive benefits from U.S. Census mailings.

The company's international operations increased its sales in 2010 to $2.486 billion. The growth was largely attributed to 26% increase in Asian sales. From 2006 to 2010, overall revenues increased from $9.316 billion to $10.018 billion.

The company is heavily leveraged. It has $6.257 billion of total debt obligations as of December 31, 2010. As such, the company is susceptible to declines in business but shareholders could also experience outsized gains if business continues to improve as international operations expand and the domestic economy improves.

Notable investors include Capital Group and Elm Ridge Management.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MTOR, TTWO over the next 72 hours.

Additional disclosure: I own JRCC shares.