Companies across all industries and sectors-- whether large, medium or small cap -- can fall out of favor with investors. Large scale sells will drive prices down, leaving some stocks undervalued. Investors can earn substantial gains by buying, holding and eventually selling these stocks once they reach their fair values. With the use of fundamental analysis, investors can find these hidden treasures and increase their own wealth. Below are 5 undervalued companies. Using the discounted free cash flow valuation metric, I have assigned a fair value to each. Investors should buy these companies at their current low price and sell them once prices reach their fair value.
Thermo Fisher Scientific, Inc (TMO): Fair Value - $65. Shares of Thermo are currently trading between $49 and $50, down 24% from their 52 week high of $65. Despite modest growth rates in 2010, the company managed to increase profits by 20%. Sales in the first three quarters of 2011 have grown 13% from the same period in 2010. Thermo shares are priced relatively cheap to the company's competitors. The stock has a P/E multiple of 14, whereas the industry is currently trading at a multiple 17. The Price to Sales Ratio of 1.63, compared to the industry average of 2.03, reaffirms the company is undervalued, providing a profitable opportunity.
Transocean Ltd (RIG): Fair Value - $65. In recent weeks shares have traded at major discounts in contrast to their fair value. The company currently trades just above $40 a share, down 54% from its 52 week high. The company had a rough 2011, however the outlook for 2012 is promising. Shares are currently trading at a forward P/E multiple of 13, and analyst expect the cost of crude oil to push revenues and earnings even higher as summer approaches. Transocean has a market cap of $12.9 billion, of which $3.3 billion is cash.
As an added benefit the company pays investors a healthy 8% dividend yield ($.79 a share), which was reinstated in May 2011 after a 9 year hiatus.
Ultra Petroleum Corp (UPL): Fair Value - $60. Shares are currently trading between $25 and $26, a 50% discount from their 52 week high. Ultra Petroleum competes with other Oil & Gas independently held companies such as Cabot Oil & Gas (COG) and EOG Resources, Inc. (EOG). Shares are currently priced at a P/E multiple of 11. In contrast to the company's two major competitors Cabot and EOG, which are priced at multiples of 49 and 26, Ultra Petroleum is currently trading at a considerable discount.
Sales have grown substantially from $666 million in 2009 to $979 million in 2010. Thus far, sales have grown 23% year over year for the first three quarters of 2011. Sales are anticipated to exceed $1.1 billion for fiscal year 2011. Ultra Petroleum provides substantial wealth to investors as management mitigates expenses. Consequently, the company has maintained a profit margin of 30% or higher for the last two quarters.
Nokia Corporation (NOK): Fair Value - $11. Prior to the financial crisis of 2008, Nokia traded as high as $40, however much has changed in 3 years in the technology industry. Shares of the company currently trade between $5 and $6, down over 50% from their 52 week high. Despite shrinking margins the company still manages to outperform its competitors Ericsson Telephone Company (ERIC), and Motorola Mobility Holdings (MMI), whose poor earnings could throw a wrench into Google's (GOOG) acquisition plans, in sales. The company outperforms the industry and Motorola with an EPS of $.23, is second only to Ericsson's EPS of $.69. In comparison to the industry and its competitors, shares are trading relatively cheap at a .37 Price to Sales multiple; the industry averages a multiple of .89.
Nokia also boasts a very impressive and strong balance sheet, with $7 billion dollars of total debt and $14.3 billion of cash ($3.85 per share). A current ratio of 1.47 and a book value per share of $4.37 further highlights the strength of the company's balance sheet. Nokia also has a robust and uninterrupted dividend payment history. The dividend yield of 9% is paid once annually, with so much cash that the company has enough cash to successfully meet its upcoming obligations.
Oracle Corporation (ORCL) - Fair Value $40. Many computer users are familiar with Oracle's products; however most may not know how cheaply shares of the company are currently trading. Oracle is currently trading just above $27 a share, down almost 25% from its 52 week high. The company is currently trading at a P/E multiple of 15, less than the industry average of 24, and less than the 19 P/E of one of its largest three competitors SAP AG (SAP).
Revenue continues to grow as the company develops innovative products and services. Revenue has grown 2.4% each quarter year over year. Moreover, the company continues to deliver more value to its shareholders while reducing expenditures. Earnings have grown each quarter at 17% on a year over year basis. Oracle is best in class in terms of profitability. The company continues to outperform the market with a strong profit margin, which exceeds 25%. The company has $31 billion worth of cash and only $15 billion of debt outstanding. As an added benefit the company pays a dividend of 1%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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