3 Undervalued Companies That Deserve Your Attention
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the market firing on all cylinders and the indices hitting new all time highs on what seems like a weekly basis, there might be some cause for concern that the market is overvalued. If you are leaning towards this inclination, you may be more likely to hold your cash in a low interest savings account instead of taking a plunge into the market, and I believe you would be making a mistake in doing so. Although there are many companies trading at all time highs, there are still plenty of long-term investment opportunities.
The common metrics we will be using to identify a few companies that remain undervalued, even in this market run up, will be the P/E ratio, book value per share, and dividend yield (dividends are guaranteed returns and must be factored into any valuation analysis in my opinion at least).
First, let us take a look at AEGON (NYSE: AEG). AEGON provides life insurance, pension, and asset management services. The company is based out of the Netherlands, but operates in many markets globally. AEGON currently trades at a very attractive 6.81 times earnings and just 30% of its book value.
The company’s dividend yield of 4.3% with a promising payout ratio of 23% shows that returning cash to shareholders is a top priority. Also, the low payout ratio means that AEGON can increase its dividend nicely without much earnings or revenue growth. AEGON recorded year-over-year earnings growth in all four quarters of 2012, as well as a 29% increase in sales.
The company is actively trying to cement its foothold in Europe. AEGON recently partnered with Banco Santander to provide life and general insurance products throughout Banco's 4,500+ branches. This 25 year partnership should expose AEGON to over 12 million new clients. The company also acquired two additional companies in Romania and the Ukraine, as it attempts to increase market share in Central and Eastern Europe.
Next, we will look at another company that operates in the insurance and retirement services industry, Prudential Financial (NYSE: PRU). Prudential’s fundamentals look very similar to that of AEGON. Prudential currently trades at a forward P/E multiple of 6.81 and at 70% of book value. The company also sports a nice trailing dividend yield of 3.4%.
Prudential’s growth opportunities are also important, as the company is expected to grow its earnings at a rate of 12.6% annually over the next five years. In Q1 2013, Prudential reported a revenue increase of 296%, outpacing the industry average of just 17%. The company has also recently shown that it is very effective at managing cash flow. Q1 cash flow increased 489% compared to the prior quarter, outpacing the industry average of 6.6%.
Finally, we will look at Corning (NYSE: GLW). Corning may not be a household name, but they play a crucial role in products that we use every day. Corning produces and sells glasses and ceramics that are used in notebook computers, fiber optic cables, and scientific research equipment.
The company currently trades at 10.29 times earnings and at 90% of book value. Corning also has a cushy dividend yield of 2.5% with a respectable payout ratio of 27%. Corning is also expected to grow earnings at 12% annually over the next five years. It recently reported Q1 2013 revenue increase of 13.7%, almost 6% higher than the industry average. The company has also proven that it can manage debt effectively. Corning currently operates with a debt-to-equity ratio of 0.16 and a quick ratio of 3.81.
The market may seem overvalued as indices clime to record highs. However, it is important to remember that with the right amount of due diligence and with a focus on classic fundamentals, plenty of great businesses are still available at discounted prices.
Daniel Paterson has no position in any stocks mentioned. The Motley Fool recommends Corning. The Motley Fool owns shares of Corning. 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!