BARRON'S COVER
By Jonathan Buck
The European Union could emerge from recession in the fourth quarter, and enjoy modest economic growth next year. Why Sept. 22 is the date to watch.
Barron's: Cheap Stocks In A Pricey Market
Jul 20 at 00:10
By Andrew Bary
Even with the Standard & Poor's 500 index at new highs, there still are
plenty of stocks with a single-digit price/earnings ratio.
Within the S&P 500, about three dozen stocks are valued at less than 10
times projected 2014 earnings; the nearby table identifies 15 low P/E gems. The
single-digit group includes such well-known companies as JPMorgan Chase (ticker:
JPM), Apple (AAPL), Citigroup (C), Deere (DE), General Motors (GM), MetLife
(MET), Prudential Financial (PRU), and Hewlett-Packard (HPQ).
The S&P 500 trades for about 15 times projected 2013 profits and 14 times
estimated 2014 earnings. Small-cap indexes have higher valuations, with the
Russell 2000 index fetching about 17 times projected earnings in the coming
year. The S&P 500 is up 18% this year and the Russell, 24%.
Apple is in an unfamiliar position as one of the worst performers in the
S&P 500 this year, with a 20% decline to $428, and it's now an outlier because
it trades at a discount to virtually every major tech company. Apple changes
hands at 9.9 times estimated earnings of $43.37 in its fiscal year ending in
September 2014 and yields nearly 3%. Apple's effective P/E, excluding its
massive cash holding equal to $153 a share, is only about six. Cash accounts
for 35% of Apple's stock price, the highest percentage among major techs and one
of the highest in the S&P 500.
The iPhone and iPad maker has become more investor friendly this year with
its plan to more than double its return of capital to shareholders, to $100
billion through 2015. At its current price, Apple discounts a sharp drop in its
earnings in the coming year. That seems like an overly pessimistic scenario
given the likely launch of the iPhone 5S later this year and the stickiness and
profitability of Apple's user base of 500 million.
JPMorgan Chase came through the financial crisis in far better shape than
many rivals, and it has solidified leading positions in major businesses--
investment and commercial banking, credit cards, private banking, asset
management, and Treasury services.
Those strengths aren't reflected in its share price, which at $56 has
the lowest P/E among major banks. JPMorgan trades for 9.3 times estimated 2014
profits of $6.08 a share and yields 2.7%. Investors are worried about several
issues, including the London derivatives fiasco last year that cost the bank $6
billion, tighter rules on capital and trading, and lower profits from mortgage
originations thanks to higher rates. The bank is the No. 2 mortgage lender in
the country behind Wells Fargo (WFC).
These negatives seem reflected in JPMorgan's stock price, which trades at
a modest 1.4 times tangible book value, versus 1.9 times for Wells Fargo. The
earnings in a few years could top $7 a share. Bernstein Research analyst John
McDonald recently reiterated his Outperform rating on the stock and $62 price
target following JPMorgan's report earlier this month of a 32% rise in its
second-quarter profits, to $1.60 a share.
Barron's highlighted Citigroup's appeal in a cover story last week,
notably its international corporate and consumer banking franchise. We argued
that Citi's shares looked good relative to both tangible book value and
earnings. Citi, at $52, has a slightly higher P/E than JPMorgan based on 2014
profits, but Citi's price/tangible book ratio of one is lower. Citigroup finally
may get the regulatory OK to return a meaningful amount of cash to holders next
year; its dividend now is just 0.1%.
Refiners were one of the strongest groups in the stock market in the year
ending in March, but they have given back some part of those big gains in recent
months, with the decline becoming more pronounced recently as margins have
declined and Marathon Petroleum (MPC) and Valero Energy (VLO) preannounced
weaker-than-expected profits for the second quarter.
The refiners have benefited from low U.S. crude prices relative to global
oil benchmarks. However, the price premium of Brent crude, an international
grade, above West Texas Intermediate has narrowed to about zero from $20 a
barrel at the start of 2013. The risk is further declines in profits and
earnings projections, but some of that already is captured in share prices.
Marathon, at $68, is down from a peak of $92 in late March, while Phillips
66 (PSX), at $56, is below its high of $70.
Life insurers have been one of the strongest groups within the financial
sector this year, helped by rock-bottom P/Es and price/book ratios at the start
of 2013, as well as the increase in interest rates. Thanks to huge bond
portfolios, life insurers are vulnerable to lower rates because they're forced
to reinvest funds from maturing debt at progressively lower rates. When rates
rise, those pressures ease and spreads tend to widen on products like fixed-rate
annuities.
All of this helps explain why industry leaders MetLife and Pru are up so
sharply in 2013. "MetLife and Prudential are still attractively valued," says
Nigel Dally, Morgan Stanley's life-insurance analyst. Life insurers, he notes,
continue to be valued at a discount to other parts of the financial sector. "If
rates move higher, there is an argument for continued strong performance of the
group."
MetLife, at $48, and Prudential, at $78, trade for under nine times
estimated 2014 earnings. MetLife is valued at a small premium to a conservative
measure of book value that excludes investment gains, while Prudential commands
1.4 times that measure of book value.
General Motors is another beneficiary of higher rates and a stronger stock
market because its huge pension liabilities shrink.
The pension benefit was one reason that Goldman Sachs auto analyst Patrick
Archambault added GM to the firm's Conviction Buy list last week. He has a $45
price target on GM, which traded on Friday at $36. The pension liabilities of
GM and other companies shrink when rates rise because those liabilities are
discounted at higher rates. GM should benefit from its newly redesigned full-
size pickup, part of what the Goldman analyst calls "one of the most attractive
product stories in the sector." Archambault also sees GM instituting a dividend
around year end, which should help the stock relative to Ford Motor (F), which
yields 2.3%.
Apache (APA) has one of the lowest valuations among sizable oil and
natural- gas exploration companies, partly because of its exposure to Egypt,
where it gets about 20% of its energy output. Ensco (ESV), the focus of a
bullish Barron's feature earlier this year ("Drilling Deep for Value," Jan. 14),
is the second-largest provider of offshore rigs for the energy industry. At
$60, it trades for less than eight times estimated 2014 profits and yields
over 3%. The rig-industry outlook looks good because offshore drilling remains a
highly cost- effective exploration area for energy companies.
Deere is another low P/E industry leader. The farm-equipment maker trades
at $ 83, just under 10 times next year's projected profits, and yields 2.4%.
Freeport- McMoRan Copper & Gold (FCX), a top copper producer whose shares are
down 17% this year, to $28, offers a play on depressed copper and gold prices.
Weekly Preveiw
-- Shareholders of Dell take a delayed vote on whether to endorse founder
Michael Dell's plan to take it private. It's unclear whether the buyout group,
facing stiff opposition from big investors, will sweeten its $24.4 billion
bid.
-- Campbell Soup hosts analyst meeting.
-- Big earnings day: Ford Motor, Boeing, PepsiCo, and Caterpillar are
among those posting quarterly results.
-- Look for new-home sales to jump 7% in June to an annualized pace of
510,000 units, says Berson. Sales will be helped by an improving job market,
good demographics, and a perverse push to buy as mortgage rates rise.
-- Luxury residential-community developer WCI Communities is set to price
8.41 million shares at $21 to $23 each.
-- The parent of Mercantile Bank seeks bankruptcy-court approval to put
its ownership stake on the auction block.
Thursday 25
-- Durable-goods orders are likely to rise 1.7% for June, a bit slower
than May's 2.1% pace, says Berson.
-- Seasonal distortions make it difficult to forecast weekly jobless
claims, but Berson estimates they will rise to about 340,000 from the 334,000
reported the previous week.
-- Nissan Motor, Starbucksand Amazon.com report quarterly results.
-- Marlin Midstream Partners, a midstream energy-asset owner and operator,
is set to price 6.25 million shares in the range of $19 to $21 each.
-- Shares of Franklin Resources split, 3-for-1, after the market close.
-- The SEC's Investor Advisory Committee holds a public meeting on some
provisions of the Dodd-Frank Act.
-- Tunisian opponents of the ruling Islamist party have called for mass
anti- government demonstrations.
Friday 26
-- Thomson Reuters/ University of Michigan consumer sentiment index
issued.
Coming Earnings
Day Quarter Consensus Year Ticker
Estimate Ago
M
Kimberly-Clark 2Q $1.39 $1.30 KMB
Halliburton 2Q 0.72 0.80 HAL
Texas Instruments 2Q 0.41 0.44 TXN
McDonald's 2Q 1.40 1.32 MCD
T
DuPont 2Q 1.27 1.40 DD
Altria Grp 2Q 0.63 0.59 MO
United Technologies 2Q 1.57 1.62 UTX
Illinois Tool Works 2Q 1.10 1.11 ITW
ACE 2Q 1.94 2.17 ACE
Travelers Cos 2Q 1.61 1.26 TRV
United Parcel Svc 2Q 1.13 1.15 UPS
Lockheed Martin 2Q 2.20 2.38 LMT
Apple 3Q 7.31 9.32 AAPL
AT & T 2Q 0.68 0.66 T
W
PepsiCo 2Q 1.19 1.12 PEP
Ford Motor 2Q 0.37 0.30 F
Boeing 2Q 1.57 1.27 BA
Visa 3Q 1.79 1.56 V
EMC 2Q 0.42 0.39 EMC
QUALCOMM 3Q 1.03 0.85 QCOM
Lilly (Eli) 2Q 1.00 0.83 LLY
Thermo Fisher Scient 2Q 1.30 1.22 TMO
Caterpillar 2Q 1.70 2.54 CAT
Praxair 2Q 1.49 1.42 PX
Th
Starbucks 3Q 0.53 0.43 SBUX
Bristol-Myers Squibb 2Q 0.44 0.48 BMY
Gilead Sciences 2Q 0.50 0.50 GILD
Celgene 2Q 1.44 1.22 CELG
Precision Castparts 1Q 2.90 2.35 PCP
Amazon.com 2Q 0.06 0.16 AMZN
3M Company 2Q 1.70 1.66 MMM
Dow Chemical 2Q 0.63 0.55 DOW
Biogen Idec 2Q 1.93 1.82 BIIB
Colgate-Palmolive 2Q 0.70 0.67 CL
F
LyondellBasell NV 2Q 1.62 1.66 LYB
(Earnings are diluted and report dates are tentative. All forecasts and
historical numbers exclude extraordinary items by accounting definitions.)
Source: Thomson First Call
Economic Calender:
Consensus Estimate
Day Time
Consesus Est Last Period
M 10:00 June Existing Home Sales 5.26 mil 5.18 mil
W 10:00 June New Home Sales 481,000 476,000
Th 8:30 June Durable Goods 1.0% 3.7%
F 9:55 July Michigan Sentiment (f) 84.0 84.1
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