The 3 Most Undervalued Dow Components
Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Dow Jones Industrial Average has been around for over a century. It has become the index that news anchors up and down the United States turn to when reporting the markets -- although some would wish that would stop. The index contains 30 of America’s largest companies, and I’m willing to bet there’s still value to be found within. Let's size up three particularly promising components.
Microsoft (NASDAQ: MSFT)
Is there a better way to get this article started than with a look at Microsoft? The stock has long been considered a value trap by some investors, and rightfully so. The stock price hasn’t pushed past $32 much over the past five years, despite the company’s P/E ratio of 15.44 being below the industry average of 22.
Microsoft's largest division is its Office segment. The company makes around 30%-32% of its revenue from selling this software to individuals, governments, universities, and corporations around the planet (Microsoft 10-K). With its market share in the segment topping out somewhere above 90%, it’s hard to think that there’s much more room to grow, but there is.
Office 365 will place users on a subscription-based model that charges them to use the platform. Additional features, such as cloud connectivity, may decrease Microsoft's margins. But this consistent revenue stream should keep the Office division cranking out free cash flow for the foreseeable future.
Outside of Office, which made up approximately 32% of 2012 revenue, Microsoft has its Server and Windows divisions. Both divisions lead their respective markets, and combined, they make up approximately 50% of the company’s revenue. Making up the remainder of Microsoft is the online services portion (Bing, aQuantive), Xbox, Windows Phone, and Skype
So is there any chance of a Microsoft comeback over the next few years? I think there is. First, in the Office segment, I believe that the company will be focused on getting people into the new platform. At a price of $10 per month for homes, and $15 per user per month for businesses, this could be incredibly lucrative for Microsoft. If they can pull it off, they’d have plenty of additional free cash flow to deal with each month.
As for the web services division, it’s not doing too well in terms of finances. Microsoft’s search engine, Bing.com, continues to increase its search market share and is now sitting at around 16.7%. But it has a huge hill to climb before it'll start scaring Google’s 67.5% share.
How about Xbox? That’s another division at Microsoft that I believe will benefit. The current Xbox 360 is trying to build itself as the one and only set top box you’ll need. You can watch Netflix, sports and more on them now and viewers in the UK can also get the nation’s most popular TV service up and running through it. With all of the available apps, it would be easy for a new user to set one up and have more content than they can ever use at their fingertips.
Intel (NASDAQ: INTC)
Sticking with the technology sector, we have Intel. Its processors power the computers we use and the web we browse. The company brings in sales of around $50 billion per year from a trio of target markets: notebook, server, and desktop processors. Those three provided around 74% of Intel’s 2012 sales.
Intel enjoys market dominance in a variety of growing areas. The company holds around 75% of the notebook processor market, as well as 90% of the server processing market. Both areas are growing in terms of customers, and both contribute to the company's impressive margins.
The Intel Atom processor is part of Intel’s jump into the mobile game. This line of chips can be used in tablets, cellphones and even microservers. There is a lot of competition in this area right now with companies like Nvidia, Marvell, Qualcomm and even Appleall making their own chips for the mobile game. Intel currently has only a small piece of this market, less than 5% of it. Therefore, focused efforts could see Intel growing their mobile market share and making a fair bit of money by doing so.
With $15 billion in cash, according to the its 10-K (PDF), Intel could have a fighting chance at making its name the world of mobile, but it’ll take a lot to stand out from the crowd listed above.
JPMorgan Chase (NYSE: JPM)
Let's change tracks and focus on JPMorgan, one of the financial industry's leaders. This bank operates in a diverse set of areas, including -- in order of revenue contributions -- sales and trading, retail banking, credit cards, mortgage banking, and commercial banking.
When it comes to retail banking, JPMorgan is the industry titan (WSJ). When it comes to deposits by consumers, there’s no beating this bank. And that’s a good thing.
Chase has more than 5,600 branches spread around the nation and more than 19,000 accessible ATMs for account holders. Their sheer presence on the high streets all around the nation will bring more customers through their doors as the years pass by.
As unemployment comes down, and earnings go up, I’d also be expecting to see higher balances in checking accounts at banks across the country. As the biggest of those retail banks, Chase will be collecting more than anyone else, all while earning anywhere between 2% and 5% interest on that money.
Other areas of the banking giant will continue to grow, although not at the rate of retail banking. JPMorgan is the best option for anyone wanting to gain some exposure to the banking sector.
All three of these stocks have been on my radar as being some of the best that the Dow has to offer. I believe that over the next few years, investors will see great gains from Microsoft, Intel, and JPMorgan.
The rise in mobile and internet usage should benefit Microsoft, while mobile will also play a big part in the goings on at Intel. JPMorgan will benefit from a popular brand in the retail banking world, and it'll make lots of additional revenue from the deposits that come flowing in.
Ash Anderson has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel, JPMorgan Chase & Co., and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!