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Total S.A. looks attractive

|Includes: TOTAL S.A. (TOT)

I recently read about a screen for value stocks that Benjamin Graham created right before his death.  It is very stringent and it is unlikely that any large cap stock today would pass all criteria.  In this case, Graham recommended buying:

1) stocks trading below their net current asset value per share

or

2) stocks that meet the following criteria:
a) TTM earnings yield at least 2x AAA-bond yield
b) TTM dividends yield at least 2/3 AAA-bond yield
c) Total debt less than 2/3 of tangible book value

James Motimer, who specializes in applying behavioural psychology to finance and investing, adds a fourth criteria (to screen #2) which is a Graham & Dodd PE below 16.  G&D PE is a ten year moving average of earnings meant to smooth out the effect of cyclical earnings.

I applied screen #2 to companies with at least $10 billion in revenues.  Only 1 stock met all four criteria - Total S.A. (symbol TOT).

Based on the closing price on July 30, TOT measures as follows:

a) TTM earnings yield of 10.0%
b) TTM dividend yield of 5.7%
c) Total debt is 0.63x tangible book value
d) G&D PE of 10.84

I then applied a reverse discounted cash flow (NYSE:DCF) to try and understand the market expectations built into the stock by reviewing analyst estimates and historical results.  Per my calculations, at $50.63 the market expects a modest 5-year sales growth rate of 2.2%, an operating profit margin of 12.5% and a discount period of 4 years.  Total's average profit margin was 16.2% over the past 5 years and 14.8% in 1H'10.  Going forward, I don't see any major risks that could threaten their margins although they will continue to face continued pressure on natural gas prices.

TOT stock is down 23% year to date, but the drop really began in April when BP's deepwater oil rig exploded in the Gulf of Mexico.  It is the 5th largest oil and refining company in the world, and is trading cheaply because the entire energy sector has been hit due to the BP crisis.  In addition, its high dividend yield makes this a very attractive proposition.


Disclosure: No positions