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As investors have become more and more sophisticated, the price-to-earnings (P/E) ratio has begun to be viewed as a less-sophisticated, overly-simplistic tool. But sometimes, there’s power in simplicity.
The fact of the matter is, the P/E ratio is still the ultimate “bottom line” concept — how much are investors paying for earnings?
1. Ford (NYSE: F)
To be fair, Ford Motor’s earnings have been falling since 2010. The company earned $1.91 per share in 2010, but only brought home $1.51 last year. This year is expected to be even less impressive, with analysts only looking for a profit of $1.46 per share. In that light, the stock’s 32% drop since the end of 2010 does make a little sense.
On the other hand, the punishment doesn’t even come close to fitting the crime. Ford’s P/E of 7.5 is simply rock-bottom compared to the market’s average P/E of 14.2.
No, the current year doesn’t look encouraging earnings wise, but it’s not like Ford isn’t selling more and more cars. The auto manufacturer sold 1.9 million vehicles in 2010, up 19% from 2009′s total. In 2011, Ford sold a little more than 2 million cars and trucks. The year-to-date total is well ahead of the total at this point a year ago, too. The point is Ford is clearly capable of doing what it needs to do in the long run — sell more cars.
Either way, it looks like the income-statement woes will likely clear up by next year, with forecasters saying the company will earn $1.72 per share. That translates into an overlooked forward P/E of 6.6, based on current stock prices.
2. Xerox (NYSE: XRX)
Yes, people still make photocopies, and a lot of them. The market doesn’t seem to believe it, considering Xerox shares are trading at a mere 8.7 times earnings. After two straight years of increased earnings, though, and another improvement in the cards this year, the argument that the copier business is dead is getting more than a little tired.
There’s another understandable reason investors remain this unimpressed with the company. On almost every other measure used to grade stocks, Xerox looks ugly. For instance, net margins are a mere 5.7%, the return on equity is only 10.7%, and revenue has only grown by 4.6% for the past four quarters. They’re all sub-par. Yet, what the company lacks in pizzazz, it makes up for in consistency — at least we can rely on net margins of around 5.7%, and sales growth of 4.6%. It may not be sexy, but you’re paying next to nothing for those reliable results.
All that being said, while Xerox is known as a copier company, it’s quietly ramping up its offerings in the digital arenas of health care records, human resources document management, finance and accounting services, and more. Even if the legacy business is dead in the water, the company’s well-positioned for the future.
3. MetLife (NYSE: MET)
Although its earnings have been far more erratic since the 2008 crisis, MetLife is approaching its peak earnings levels from 2007 again. The insurer earned a whopping $3.25 per share in 2007, but watched that number slump to $2.91 in 2009. Last year, however, the figure was pumped back up to $5.02, and is — or was anyway — expected to be at least a little higher this year.
But MetLife just posted a loss of $0.09 for the first quarter, well shy of the $1.25 profit analysts were expecting. It was a blow the company didn’t need, either, considering it was also one of the outfits that didn’t pass the Federal Reserve’s stress test last month. As a result of the failed stress test, it wasn’t allowed to raise its dividend, either.
It all seems like a brewing disappointment for shareholders. In this case, though, the problems on the surface aren’t problems under the hood.
The reason MetLife lost $0.09 per share stems from a $1.98 billion loss on derivatives trades the company normally buys as a hedge against changes in interest rates and currency exchange rates. It wasn’t mismanagement or systemic ineptness — it was just miserably bad luck. Had it not booked the derivative loss, the per-share income total would have been $1.76.
As for failing the stress test, CEO Steven Kandarian actually made a valid point by saying in March, “We are deeply disappointed with the Federal Reserve’s announcement. We do not believe that the bank-centric methodologies used under the CCAR [Comprehensive Capital Analysis and Review] are appropriate for insurance companies, which operate under a different business model than banks.”
Simply put, at a trailing P/E ratio of 5.5, MetLife is a bargain, at least by insurance company standards. It’s being punished like a company other than an insurer, however, which may be a temporary condition that the market will recognize.
Risks to Consider: Though unfairly undervalued now, there’s no guarantee investors won’t remain unimpressed in the foreseeable future and fail to apply any new buying pressure.
Action to Take –> It’s tough to get excited about a stock others aren’t excited about, but as Warren Buffett can attest, the stocks to buy are the ones nobody cares about at the time. In that light, all three are solid opportunities right now.
If investors only had room for one though, then I think MetLife is it. Between the stress test and last quarter’s loss, the market’s opinion on the insurer is just shy of disgust. The perceived problems aren’t nearly as big as they’re being made out to be. As investors start to realize the same, shares could offer as much as a 40% to 50% upside by the end of this year.
– James BrumleySource: StreetAuthority
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