A combination of companies with high growth and cheap valuations is hard to find. Below, I have identified and analyzed 5 companies that are trading at a discount to their peers and have strong growth prospects.
Applied Materials (AMAT): Applied Materials is in the business of manufacturing semiconductor equipment. It caters to some big brands like Samsung (SSNLF.PK) and Intel (INTC). The stock has come down by around 21% in the past twelve months. The company's last reported results are for the full year ending October, where its revenues are up by 10% year-on-year, while earnings are up by 108%. The company has healthy operating and profit margins of 22.4% and 18.3% respectively. It also has a strong balance sheet with a current ratio of 3.71, and a total debt to equity ratio of 0.22. With revenues of over $10 billion last year, the company generated operating cash flows of $2.43 billion. With 3-D technology and related products expected to pick up pace in demand, the semiconductor industry is expected to see strong growth, and companies that are suppliers to this industry, like Applied Materials, are expected to benefit as well. The stock is currently trading at a forward price to earnings ratio of 10.7x and offers a forward annual dividend yield of 2.6%. Considering the company's growth outlook, it is being traded quite cheaply, especially when shares of other companies in the sector like KLA-Tencor Corporation (KLAC) and Lam Research Corporation (LRCX) are trading at forward price to earnings multiples of over 11 times.
Teva Pharmaceutical Industries (TEVA): Teva Pharmaceuticals saw its stock price decline by 16% in the past twelve months after which, stock is now trading at a forward price to earnings ratio of only 8.2 times, and offering a forward annual dividend yield of 1.5%. In its last quarter, the company's reported revenues increased by a mere 2% while its income dropped by 12.8%. The company's revenues have increased by 25% over the past five years, while earnings have gone up by 18%. On the balance sheet side, the company is stable with a current ratio of 1.13 times, and a total debt to equity ratio of 0.36. Other companies in the sector are all trading at forward price to earnings ratio of 9 times or more - Mylan Inc. (MYL) trades at 9 times, Watson Pharmaceuticals (WPI) trades at 9.9 times while Novartis (NVS) trades at 9.8 times. Recently Teva announced its intention to start benefiting from a generic drug of Lipitor from May 2012, after which the company's revenues and earnings are expected to see a significant boost. The company has a forward price to earnings growth ratio of 0.92, and is therefore visibly being undervalued at current stock price.
Nuance Communications (NUAN): Nuance Communications is ideally positioned to benefit from the widespread use of voice technology in the coming years. Last year in October, the company acquired Swype for $100 million, which is the name behind the virtual keyboard used in Android touch screen phones. There are also very strong, though uncertified, rumors that Nuance is the company behind Apple's new popular feature, Siri. Nuance saw its stock price increase by 42% in the past twelve months and is currently trading at a forward price to earnings ratio of 15 times. Last year sales were up 18%, while earnings grew by a massive 282% as the company started generating profits. Over the past five years, the company's revenues went up by 28%, while the industry sales saw a growth of 12%. Even though Nuance is trading at the same forward price to earnings growth of 1.18 times as Microsoft (MSFT) and International Business Machines (IBM), it is expected to show higher growth. According to analysts' consensus, the company is projected to show a long term growth of 14.3%, while Microsoft and IBM are both expected to show long term growth of approximately 10%. At current price, the stock is clearly undervalued.
Discover Financial Services (DFS): Discover Financial Services is involved in providing financial credit services. The company very recently announced its new student loan services which will be available to students in the health, law and management professions. This will allow the company to significantly boost its revenues. The stock price has gone up by 36% in the past twelve months, and it offers a forward annual dividend yield of 1.5%. According to its last annual report, the company's annual top line is up by 3.2%, while the bottom line increased by over 230%. It has efficient pre-tax margins of 39%, while it offers a return on equity of 30%. It also has a healthy balance sheet with a current ratio of 1.55. It is trading at attractive levels with a forward price to earnings ratio of 8.2 times compared to its competitors, notably American Express Company (AXP) trading at 10.6 times, MasterCard (MA) trading at 15.7 times and Visa (V) trading at 14.6 times.
CSX Corporation (CSX): CSX Corporation provides railroad services. According to its latest results for the year ending December 2011, the company's revenues were up by 6% while its earnings were up by over 13%. In the past year, sales growth has been encouraging at 10%. The company has a decent balance sheet, with a current ratio of 0.90 times. Its operating and levered cash flows are both positive. The stock price for the company went down by 3.5% over the last 52 weeks. At current levels, the company is offering a 2.1% forward annual dividend yield and is trading at a forward price to earnings ratio of 10.4 times, compared to Norfolk Southern Corporation (NSC) which is trading at 12.7 times and Union Pacific Corporation (UNP) which is trading at 12 times. CSX also has a forward price to earnings growth ratio of 0.82 making it quite cheap at current levels.
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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