Undervalued or Overvalued: The Answer Might Surprise You
Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
People often have discussions about how the value of a company relates to investors. These are good discussions to have, because often times it's hard to tell how a company is valued because of growth and other factors. There are two companies that seem dramatically undervalued as well as two companies that appear overvalued -- even if it's not obvious.
Although some investors may not have heard of this company, it is believed to have developed Siri -- however due to privacy, that information has not been released. Nuance Communications (NASDAQ: NUAN) provides voice dictation devices and virtually anything that can turn your voice into a command. With double-digit growth and trading at 11x the estimated earnings for the year ahead, it appears this company is dramatically undervalued.
Nuance operates in four divisions and has established devices for both consumer and mobile products. The company provides services to the likes of Mercedes Benz, Garmin, and Bose. Aside from these major companies, many doctors are starting to use their products for patient dictation notes, and we have all heard their recordings that allow responses instead of an option of numbers. For instance: "To make a payment say, 'make a payment.' For information regarding your account say, 'account information.'"
Google is likely the strongest competitor to Nuance in an industry that is evolving very rapidly. While Google is active in this area, Nuance doesn't appear to have any serious competitors, which is good for investors.
After a $182 billion tax payer bail out, this next undervalued company is one that people love to hate. Many people are not willing to forgive American International Group (NYSE: AIG) despite its asking for forgiveness and having released several ad campaigns thanking people. These have not been well received by the general public, but this post is about value -- not how likable a company is.
The company is trading at around $40/share, while its book value is showing the stock worth approximately $69/share. What does this mean? If an investor receives a 10% return on equity (ROE), they will receive nearly a 20% annualized return. AIG recently sold an aircraft leasing division that actually hurt the book value of the company. In 2012, nearly $14 billion was spent in buying back shares. Even after turning the ship around, the stock is still cheap considering its tainted views by the public.
Bristow Group (NYSE: BRS) owns and leases helicopters to deep sea oil drillers. They basically fly staff, equipment, supplies, or other needed items to the oil wells and back to land again. The company does have recurring revenues, which means regardless of hurricanes or other setbacks, the company still makes money. In reality, these events could help the company, because helicopters are grounded, and there are fewer expenses involved.
Bristow Group however, is not a high-return business. Their ROE is only about 6%. With book value around $43/share, the company is trading at around $58. Even with the company being overvalued right now, if the stock drops back to the low $40s, investors might consider buying into the business.
I probably won't make many fans when I tell you Netflix (NASDAQ: NFLX) is overvalued, but that is my belief despite the promising metrics. The company has had an amazing run recently, increasing approximately $80/share year-to-date. Netflix now owns exclusive content with House of Cards, and have been investing heavily in these type of products. However, they are not unmatched by companies like Amazon.
This is a very difficult business for Netflix to be in right now as companies with much larger cash balances and purchasing power are making huge investments. Netflix is doing a tremendous job right now, but I still believe its overvalued. Here is why.
Any mistake Netflix makes will be punished severely by the marketplace. They would have to be perfect in order to maintain their value. While they could achieve this, the upside/downside ratio right now is too much for my personal liking. The company has a wide customer base at this point, but earnings and free cash flow are minimal. FCF yield for the company is slightly above .5%. The company may be a victim of their own success, because the more customers they acquire, the more content providers are going to demand for movies.
The Foolish Conclusion...
From voice command companies like Nuance, to financial companies like AIG, there are a variety of seemingly undervalued companies available. While Netflix is performing well right now, the slightest slip up could send it spiraling downward. Bristow Group is priced well over book value, but may see prices drop soon. Keep an eye on all of these companies as we move forward -- these valuations could change quickly.
tlwofford has no position in any stocks mentioned. The Motley Fool recommends American International Group, Netflix, and Nuance Communications. The Motley Fool owns shares of American International Group, Netflix, and Nuance Communications and has the following options: Long Jan 2014 $25 Calls on American International Group. 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!