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Top Value Stocks Trading Below Revenue

GuruFocus.com
·7 min read

In November 2019, an affiliate of Apollo Global Management (NYSE:APO) outbid Warren Buffett (Trades, Portfolio) to acquire Tech Data Corp. (NASDAQ:TECD) for $5.4 billion.


The Oracle of Omaha notoriously dislikes being involved in bidding wars, and this case was no exception. After a single bid, Buffett bowed out of the attempted acquisition. However, the fact that he took an interest in the company at all is a sign that it was undervalued.

Tech Data is a major global provider of hardware in the tech industry. Without the glamour of cutting-edge consumer products or semiconductor development, speculators didn't drive up the company's valuation, but its extensive catalogue of essential tech hardware brought in revenue of $37.08 billion over the past 12 months - several times higher than the company's $5.11 billion market cap.

Using the GuruFocus All-in-One screener (a Premium feature), I searched for companies with trailing 12-month revenue that exceeds their market cap. These companies also have high GuruFocus financial strength and profitability scores and are otherwise trading at attractive valuations.

China Petroleum & Chemical

China Petroleum & Chemical Corp. (NYSE:SNP), also known as Sinopec, is a Beijing-based oil and gas company that also produces biodiesel, green jet fuels and ethanol.

As of Jan. 30, it has a market cap of $65.23 billion, a price-earnings ratio of 9.69, trailing 12-month revenue of $442.28 billion, trailing 12-month net income of $6.71 billion and a cash-debt ratio of 0.45. GuruFocus has assigned the company a financial strength rating of 6 out of 10 and a profitability rating of 6 out of 10. The share price has generally followed revenue in the past.

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Energy companies typically have low profit margins, so it isn't surprising that Sinopec is no exception. However, it is less common to find an energy company with high financial strength. Marathon Petroleum Corp. (NYSE:MPC), for example, has a cash-debt ratio of 0.05 and a financial strength score of 4 out of 10, while Halliburton Co. (NYSE:HAL) has a cash-debt ratio of 0.2 and a financial strength score of 5 out of 10.

In general, the energy sector is not an attractive one for investors. Competition abounds, and customer growth is limited by macroeconomic conditions. As you can see in the chart below of the Energy Select Sector SPDR Fund (XLE) exchange-traded fund over the past decade, the prices of energy stocks have had their ups and downs over the years, but they have ultimately hovered around a central line. If the losses from a share price decline of 50% can only be recouped by an increase of 100%, then a price that has been fluctuating around a central line in recent history does not provide a promising risk-reward ratio.

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Oil and natural gas supplies have been growing faster than demand in recent years, driving prices down across the board. However, the energy sector's ups and downs also mean that investors have an opportunity to buy at the bottom. As you can see in the chart below, Sinopec's share price and earnings have been trending down along with the rest of the sector in recent years, but they won't keep going down forever. Eventually, demand will strengthen against supply, leading to price hikes.

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As a Chinese energy company with high financial strength, Sinopec is in a particularly good position to take advantage of an eventual increase in energy prices. The company is also in the process of reviewing a $16 billion deal with Cheniere Energy (LNG) for liquified natural gas, though complications have arisen due to the U.S.-China trade war. China is on a path to become the world's biggest LNG importer by 2025, while the U.S. is set to surpass Australia, Russia and Qatar as the world's biggest LNG exporter.

Centene

Originally founded as a nonprofit Medicaid plan, Centene Corp. (NYSE:CNC) has evolved into a major provider of government-sponsored health care programs in the U.S.

As of Jan. 30, the stock has a market cap of $36.79 billion, a price-earnings ratio of 19.51, trailing 12-month revenue of $72.33 billion, trailing 12-month net income of $1.35 billion and a cash-debt ratio of 1.0. GuruFocus has assigned the company a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10.

This stock has certainly seen its ups and downs over the past year. The share price began plummeting toward the end of 2018 due to a U.S. federal judge ruling parts of the Affordable Care Act unconstitutional, as investors began factoring in speculative losses. Those losses remained completely speculative, as the company ended 2019 with continued increases in revenue and net income.

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On Jan. 23, Centene completed its acquisition of WellCare Health Plans (NYSE:WCG), another provider of government-sponsored health plans. WellCare became a wholly-owned subsidiary of Centene and shed its Medicaid and Medicare programs in three states in order to obtain regulatory approval for the merger. The high synergy of the companies is promising for Centene's top and bottom lines.

"Through the integration planning process, it has become even more apparent that our goals, cultures and values are aligned," Chairman and CEO Michael Neidorff said.

Although U.S. citizens no longer have the threat of being fined for not having health insurance hanging over their heads, improving health care conditions and declining birth rates have resulted in an aging population, and the health care sector is expected to grow in the doubled digits over the next decade. Thus, the number of people with health insurance, particularly government-sponsored health insurance plans, will increase. Analysts estimate that Centene's revenue will grow to approximately $79 billion for full-year 2020 and $82 billion for 2022.

Oshkosh

Oshkosh Corp. (NYSE:OSK) is headquartered in Oshkosh, Wisconsin. The company designs and builds specialty trucks, military vehicles and fire apparatuses and access equipment for airports.

As of Jan. 30, the stock has a market cap of $5.95 billion, a price-earnings ratio of 10.64, trailing 12-month revenue of $8.38 billion, trailing 12-month net income of $579 million and a cash-debt ratio of 0.55. GuruFocus has assigned the company a financial strength rating of 7 out of 10 and a profitability rating of 8 out of 10.

According to the Peter Lynch chart, the stock is currently trading below its intrinsic value.

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The gap between Oshkosh's share prices and its intrinsic value is partially due to the businesses it's in. The latest developments in military vehicles and airport access equipment typically don't make the news. Neither do Oshkosh's other products, which include refuse collection vehicles, concrete mixers, tow trucks and snow removal vehicles. However, in the specialty vehicles sectors, few can compare to the strong reputation of the company's brand names, and it is far more diverse than competitors when it comes to trucks.

Although the business is strong, investors face significant risk due to two main factors: the government and economic cycles. As you can see in the chart below, Oshkosh's profits took a hit during the 2008 financial crisis.

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When bear markets strike and the federal well runs dry, a company that primarily sells vehicles to the government is in double danger, which is why investors are cautious regarding this stock. Conversely, bull markets provide strong periods of growth as government spending picks back up. Thus, it is essential for investors to keep up with not only economic health, but also government spending in these sectors.

Disclosure: Author owns no shares of any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful analysis or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.