Three Undervalued Stocks Delivering Strong Earnings

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When a stock is trading at a discounted valuation, that’s usually because investors are concerned about the outlook for the company in the middle term. For this reason, it makes a lot of sense to look for companies with attractive valuations and strong earnings reports, since these are the companies defying negativity with solid financial performance. Here are three undervalued stocks that are reporting solid earnings.

Luxurious Profitability

Coach ) is in the business of high end bags, shoes, and accessories, and investors have been concerned about the negative effects of uninspiring economic growth on demand for these kinds of discretionary products lately. Shares of Coach are trading at a P/E ratio of 16.3, while the typical valuation for the stock over the last few years has been around a P/E of 20.

However, the company dissipated many doubts after reporting better than expected earnings per share figures on Oct. 23. More important than the earnings data is the fact that the company is doing very well in key markets like North America, which showed a 5.5% increase in comparable store sales, and China, which delivered a sales increase of 40% on the back of double digit comparable store sales.

Coach is a very special company, with profitability numbers above the competition in the area of 30% when it comes to operating margins. The company is very successful in China and has ambitious expansion plans in the rest of the Asian region. These kinds of stocks are not easily found at discounted valuations, so current levels look like an opportunity to accumulate shares of this high quality business at a convenient price.

Digging for Profits

Shares of Caterpillar (NYSE: CAT) are trading at a P/E ratio below 9, which looks temptingly cheap in comparison to the stock’s five year average P/E ratio of 20. The business is a notoriously cyclical one, and the company has warned about the negative effect of slowing demand from the commodities and mining segment. Growth will remain under pressure due to economic headwinds in the middle term.

Although revenues missed forecasts for the last quarter, Caterpillar reported better than expected earnings as operating margins (excluding a one-time gain from the sale of its logistics operations) climbed to 14.1% from 11.2% in the previous year. Investors have reasons to feel comforted by the fact that Caterpillar is efficiently streamlining its operations in a challenging economic scenario.

Caterpillar has a dominant market share in a business in which size and economies of scale are a valuable asset, so the company will be fine in the long term. A big positive factor for the business would be a strengthening demand for construction equipment in the US, and the data over the last months looks optimistic regarding that segment. Shares of Caterpillar will likely remain volatile in the middle term, but they offer big upside potential for patient investors over the following years

Riding the Road to Growth

Ford (NYSE: F) has been one of the most spectacular recovery stories in corporate America over the last years. The company has made remarkable progress when it comes to the quality of its products, the efficiency of its operations, and its financial position. In spite of that, Ford is facing some serious challenges coming from the economic environment, particularly in Europe.

Ford is implementing a deep restructuring of its European operations, but the old continent will remain a drag on profitability over the next quarters. On the other hand, demand for the company´s products in North America has been very strong lately, and that's the main reason why Ford reported better than expected earnings of $0.40, versus the $0.30 forecasted by analysts in the last quarter.

The company is investing heavily in China, a market in which General Motors (NYSE: GM) has gained market share compared to Ford over the last years. Both American automakers are benefiting from the territorial dispute between China and Japan, which has produced strong negative sentiment towards Japanese competitors in the world´s largest car market. While sales of Toyota (NYSE: TM) in China fell by a 44% during October, Ford and GM increased their sales in the country by a 48% and 12%, respectively.

The auto industry is a notoriously difficult one, with low profit margins and a lot of sensibility to the economic cycle. But Ford is trading at a forward P/E below 8, so this iconic American automaker has plenty of upside room if management continues driving the company down the road to higher profitability.

Bottom Line

Buying high quality companies at discounted valuations is always a good idea, and doing it when they are reporting better than expected earnings may be an even better possibility. These three stocks are fundamentally solid for the long term, and they are proving that to investors by delivering strong earnings figures.

Compare And Contrast

The Motley Fool always has something great to offer, so make sure you take a look at the premium reports for Ford, General Motors, and Caterpillar. All great guides to enriching your portfolio and helping you become a better investor.


acardenal owns shares of Coach, Ford and Caterpillar. The Motley Fool owns shares of Coach and Ford. Motley Fool newsletter services recommend Coach, Ford, and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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