4 Stocks That Can Bounce Back In 2012, 1 That Can't
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite the European sovereign debt crisis and growing concerns about China, recent independent surveys by Grant Thornton have revealed that US business executives are showing greater confidence in the U.S. economic outlook. This increasing business confidence can be attributed to better than expected manufacturing results, greater investment in U.S manufacturing plants, and data that indicates U.S inflation is in check.
Accordingly, all of these factors indicate that the U.S. economy is in better shape than previously predicted and that economic growth has resumed. On this basis I feel it is the time to analyze five stocks that performed poorly in 2011 to see whether they will bounce back and offer solid investor returns in 2012. After applying my unique fundamental analysis I have found four stocks, that I believe will bounce back in 2012 to deliver solid investor value and one that won't. As always use my analysis as a starting point for conducting your own due diligence prior to investing.
Cummins Inc (NYSE: CMI)
Cummins is a Fortune 500 corporation that designs, manufactures, distributes and services engines and related technologies in approximately 190 countries, through a network of more than 500 distributors and approximately 5,200 dealers. It is the fourth largest participant in the diversified machinery industry with a market cap of $20 billion.
Cummins' performance outlook is dependent on worldwide demand for industrial machinery and engines and this dipped with the sluggish economic environment and drop in business confidence that we saw through 2010 and 2011. It has a 52 week trading range of $79.53 to $121.49, and is now trading at around $105, with a price to earnings ratio of 12.
Cummins' earnings remained steady in the third quarter 2011 at $4.6 billion, which was relatively unchanged from second quarter earnings of $4.6 billion, although during this period net income dropped by 10% to $452 million. For the same period Cummins' balance sheet strengthened despite cash and cash equivalents dropping by 2% to $1.4 billion, as long-term debt dropped by 5% to $665 million.
Cummins compares well to its competitors, its quarterly revenue growth of 36% is the sixth highest in its industry and is higher than General Electric's (GE) 0% and Tyco's (TYC) 4%. Its return on equity of 32% is also higher than GE's 11% and Tyco's 12% and is the seventh highest for its industry.
Cummins reached an intra-day high of $114 in January 2011, before announcing a downgrade in its profit outlook in October 2011. This saw the stock slide to under $100. It has now recovered to around $105, and in my opinion the company was unfairly punished by the market in 2011. This increase in value is indicative of a good start to 2012 and can be attributed to improved business sentiment regarding the U.S. economic outlook.
The company has a PEG ratio of 1, which when combined with a forward PE of 11, indicates that the company has growth potential, although it is highly likely this growth won't be spectacular. However, Cummins does have a solid profit margin of 11%, indicating the company is capable of translating any earnings growth into growing net income. However, I am somewhat concerned by Cummins high debt to equity ratio of 1.88, and weaker balance sheet. If interest rates were to rise as a result of improved economic growth, this would apply pressure to the company and its profitability.
Finally at current trading prices, I believe that Cummins appears to be unfairly valued by the market as it has an earnings yield of 8%. This is more than triple the risk free rate of return set by ten year Treasury bond yields. For all of these reasons I believe that at current prices Cummins, will bounce back in 2012 and is worthy of a second look.
Potash Corporation of Saskatchewan (NYSE: POT)
With a market cap of $39 billion, Potash is the second largest agricultural chemicals company listed in the U.S. It mines and produces potash as well as producing and selling fertilizers and related industrial and feed products primarily in the United States and Canada. It has a 52 week trading range of $38.42 to $63.97, and has dropped in value by 13% since the start of 2011, to now trade around $45 with a price to earnings ratio of 14.
For the third quarter 2011 Potash's earnings rose by 1% to $2.3 billion, while net income dropped by 0.5% to $810 million. For this period Potash's balance sheet weakened, with cash and cash equivalents dropping by 3% to $394 million, while long-term debt increased by 8% to $3.9 billion.
Potash is performing strongly in comparison to its competitors, with quarterly revenue growth of 47%, which is higher than Monsanto's (MON) 33% and Intrepid's (IPI) 25%. Its return on equity of 39% is the second highest in the industry and greater than Monsanto's 15% and Intrepid's 13%.
The short-term outlook for the agricultural chemical industry is cautiously positive, with a 12% rise in the price of potash expected in 2012. This should translate into increased earnings and net income for potash miners such as Potash, even more so for Potash due to its solid profit margin of 36%.
The earnings outlook for fertilizers is also quite positive over the long-term, with the view that demand for fertilizer nutrients, including potash, should rise significantly due to the close correlation between food demand and fertilizer demand. Long-term food demand is predicted to increase due to the rising global population, and in conjunction with growing fertilizer demand from rapidly developing countries such as China, this bodes well for potash miners and producers. For all of these reasons I believe that the long-term future for Potash is quite bright and it was unfairly punished by the market in 2011.
First Solar Inc (NASDAQ: FSLR)
First Solar manufactures and sells solar modules using thin film semiconductor technology, as well as designing, constructing, and selling photovoltaic solar power systems. It operates primarily in the United States, Germany, France and Canada.
In 2011, this former Wall Street darling had its own Icarus moment, when it was savagely burned by the market, notably after it announced an earnings downgrade in December 2011. This saw its shares plunge by around 83% to a 2011 low of $29.87. The stock is now trading at around $38, which gives the company a market cap of $3 billion and it has a 52 week trading range of $29.87 to $175.45.
For the third quarter 2011 First Solar reported a massive 90% increase in earnings to $1 billion and net income also rose by a monster 221% to $197 million. For this period the company also reported a stronger balance sheet, with cash and cash equivalents rising by 64% to $763 million, although long-term debt rose by 75% to $583 million.
When compared to its competitors First Solar is performing quite strongly. Its quarterly revenue growth of 26% is greater than Suntech's (STP) 9%, and Sharp's (SHCAY.PK) -12%. Its return on equity of 15% is also greater than Suntech's 2% and Sharp's -3%.
First Solar has a PEG ratio of 0.40, which when coupled with its return on equity of 15% and profit margin of 20%, indicates that the company is well positioned to capitalize on future earnings growth opportunities. This should also see the company translate those increased earnings growth into increased net income.
In addition, demand for solar panels remains high and should grow over the long-term as pressure grows to utilize alternate greener energy sources, which bodes well for alternate energy product manufacturers such as First Solar. The indicators for increased short-term demand for solar panels are also quite positive, as in the third quarter 2011 there was a record number of U.S. solar installations,with 449 megawatts of photovoltaic solar panels installed.
Finally, I believe that at current trading prices the stock is undervalued. Firstly, as it is trading at a 23% discount to its book value per share of $46.61 and secondly it has an earnings yield of 16%, which is more than quadruple current ten year Treasury bond yields. Accordingly, I'd have no hesitation in adding First Solar to my investment portfolio as it represents a solid value investment with strong upside, as evidenced by its recent rise in earnings and net income.
TiVo Inc (NASDAQ: TIVO)
TiVo provides television solutions and technology services, including digital video recorders (DVRs) and connected televisions in the United States and internationally. The company also offers the subscription-based TiVo service, which enhances home entertainment by providing consumers with a way to record, watch and control live television, as well as to receive videos, pictures, and movies from cable, broadcast, and broadband sources in one interface. It currently has a market cap of $1.2 billion, with a 52 week trading range of $7.06 to $12.65 and it is currently trading at around $10.
TiVo's third quarter earnings 2011 rose 6% to $65 million and for the same period net income rose by 25% to -$25 million. In the third quarter its balance sheet strengthened with cash and cash equivalents rising by a massive 529% to $604 million and long-term debt remained steady at $173 million.
When compared to its competitors TiVo stacks up well, with quarterly revenue growth of 27%, which is higher than DirecTV's (DTV) 14% and Time Warner's (TWC) 4%. It is also has the highest return on equity for its industry of 24%, which is higher than both DirecTV's -265% and Time Warner's 17%.
The company is maintaining a healthy debt to equity ratio of 0.58 and when combined with a PEG ratio of 0.53, bodes well for future earnings growth. The company has also seen earnings consistently grow over the last five quarters, with the only dip being in the first quarter 2011.
Overall in my opinion the numbers indicate that TiVo has solid future growth prospects. However, when we consider its earnings yield of 3.5%, which is only slightly higher than the current risk free yield of ten year Treasury bonds, I believe that it is overvalued at current prices. TiVo has seen a 17% rise in value since the start of 2011 and while this is a modest gain I do believe that it is unjustified based upon the company's current prospects.
Hewlett-Packard Co. (NYSE: HPQ)
Hewlett-Packard provides technology, software, solutions, and services to individual consumers, small to medium-sized enterprises, as well as to the government, health, and education sectors worldwide. It is also one of the largest diversified computer system manufacturers in the world with a market cap of $56 billion. It has a 52 week trading range of $21.50 to $49.39 and is currently trading at around $28 with a price to earnings ratio of 8.
Hewlett-Packard has seen third quarter 2011 earnings rise 2% to $32 billion and net income fall by a massive 88% to $239 million. Its balance sheet has also weakened during this period, with a 38% drop in cash and cash equivalents to $8 billion.
Hewlett-Packard stacks up well against its competitors with a price to sales ratio of 0.44, which is the lowest in the industry, and superior to IBM's (IBM) 2 and Dell's (DELL) 0.49. However, its profit margin of 0.74% is substantially less than IBM's 19% and Dell's 6%.
Hewlett-Packard has a solid return on equity of 17% and when this is considered in conjunction with its price to sales ratio of 0.44, it bodes well for future earnings and net income growth. Since the start of 2011 Hewlett-Packard has dropped by 50% in value and I believe that it has been unfairly punished by the market. Despite Hewlett-Packard's fundamentals showing a company that has appeared to stall, I do believe that in 2012 it is well placed to increase earnings and net income due to its solid return on equity and price to sales ratio. In my opinion, the company is cheap at current prices, as it has an earnings yield of 12%, which is more than four times current ten year Treasury yield.
Motley Fool newsletter services recommend Cummins and First Solar. The Motley Fool owns shares of First Solar. Vatalyst has no positions in the stocks mentioned above. 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.
