5 Bargain Stocks With a Rash of Analyst Revisions
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
From the mega-caps to the micro-caps, individual investors are wise to consider how Wall Street is valuing the stocks held in their portfolios. Likewise, experts’ ratings can be a starting point for choosing attractive investments. One measure of sentiment that goes under-appreciated is the relative change in analysts’ earnings revisions. When combined with a bargain-hunting approach, these strategies go together like yin and yang. See, the fear of most value investors is that certain undervalued stocks are trading at cheap multiples for a reason, a predicament commonly known as a ‘value trap.’ By tracking the momentum of bullish EPS revisions surrounding these types of stocks, we can determine which are likely to catapult to a fairer valuation. It goes without saying that this strategy is built upon the assumption that earnings are a key driver of stock prices. Below are five undervalued stocks that have seen significant year-ahead EPS revisions since May.
Coinstar, Inc. (NASDAQ: CSTR)
As mentioned in this article, Coinstar is a kiosk-maker bent on shopping domination. The manufacturer of Redbox and Coinstar machines is trading at undervalued price and cash flow multiples, despite strong growth in each of these areas. Specifically, CSTR is trading at P/E (12.3X) and P/CF (4.7X) ratios below the industry averages of 29.0X and 12.9X respectively. Interestingly, the company sports splendid 3-year average growth rates in EPS (75.3%) and cash flow (181.2%) generation. These figures are above its major compeititor Netflix, which has to be shaking in its boots at the possibility of a Redbox streaming movie service. In fact, CSTR has partnered up with Verizon to offer a mobile movie platform, though this may just be the beginning. In recent weeks, Coinstar reported a better than expected first quarter EPS, which led a dozen analysts to revise their year-end estimates by an average of +15.8 percent. The consensus is that CSTR will reach earnings of $4.90 a share by the end of the year, which would be a 50 percent jump from 2011.
NCR Corp. (NYSE: NCR)
Interestingly, NCR Corp is a loose competitor of Coinstar, as it is the largest vender of automated kiosks in the world. In NCR’s case, it primarily deals with ATM machines, though it has entered Redbox’s DVD domain with its Blockbuster Express terminal. In 2012, NCR has returned over 25 percent, and recently reported a positive earnings surprise of $0.47 a share, compared to the Street’s estimate of $0.37. Company execs have cited better than expected ATM sales growth to U.S. regional banks as the main driver of this growth. Consequently, analysts at ten major Wall Street firms have revised their year-ahead EPS forecasts to $2.48, a 3 percent jump from previous numbers. If these estimates hold true, it would mark an earnings spike of nearly six fold from 2011.
Syntel, Inc. (NASDAQ: SYNT)
A $2.4 billion IT consulting firm, Syntel’s stock has nearly doubled since the recession. At a current share price near $55, SYNT is trading at a deep discount. Specifically, the stock’s P/E (16.5X) is below the industry average (39.7X) and its own 10-year historical average (20.0X). Factoring growth into the equation, a PEG ratio of 0.8 tells a similar story. Syntel reported a Q1 EPS of $0.98, which was an increase of over 60 percent from Q1 of 2011. In the past month, eleven analysts have revised their earnings outlook on SYNT, raising year-end estimates by an average of 7.1 percent.
Westinghouse Air Brake Technologies (NYSE: WAB)
Here’s a fun fact: Wabtec, as it is known, has generated a year-end positive return in each of the past ten years. Surprisingly, the railroad equipment manufacturer is currently trading at a P/E (18.0X) below its 10-year historical average (22.7X), even though annualized earnings have grown by double digits since the recession. In fact, WAB’s earnings have historically traded at a 34 percent premium above the S&P’s average. This year, that premium is slightly lower, at 28 percent. More importantly, Wabtec reported record first quarter sales last month, and beat the Street’s earnings estimates with an EPS of $1.24. In recent weeks, eleven analysts have revised the company’s year-end EPS forecast by an average of +11.6 percent, reaching a consensus of $4.85 a share. If this holds, it would be a one-year jump of nearly 40 percent.
Diebold, Inc. (NYSE: DBD)
A security system and ATM manufacturer, Diebold has seen its stock rise 16.5 percent in the past year, which is a better return than competitors Tyco International and NCR Corp. Interestingly, DBD is trading at P/E (12.3X) above the industry average (11.8X), though the company did report an extreme earnings jump in 2011. Specifically, it reported an EPS above $2.00 for the first time post-recession, and beat estimates with a Q1 result of $0.74 a share. Likewise, seven Street analysts have recently revised their year-end EPS estimates by an average of +8.5 percent. With a consensus of $2.69 a share, this would be a 20 percent increase from 2011.
While this should not serve as a shopping list of stocks to buy, it can provide a starting point for analysis. In today’s markets, it’s tough to find such a rare combination of undervaluation and bullish analyst sentiment. For more trading ideas that are a bit out of the box, visit WealthLift.
Fool blogger Jake Mann does not own shares in any of the companies mentioned in this entry. The Motley Fool 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.If you have questions about this post or the Fool’s blog network, click here for information.
