Although it has been a terrible two months in the market and the outlook will remain rocky until we get some sort of resolution in Europe and the market becomes more confident about worldwide economic growth. However, the pullback has provided many bargains for long term investors. One of the most undervalued sectors of the market is in the Mega Cap stocks. Here is an analysis on the five largest stocks by market capitalization.
Exxon Mobil (XOM) – “Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products.” (Business Description from Yahoo Finance)
Overview: Exxon Mobil is the largest and probably best run public integrated oil firm. It also is the largest company by market capitalization ($341B). Exxon has pulled back over 15% in the last month and is now solidly in bargain territory.
5 reasons to like XOM at under $70 a share:
1. Exxon is a cash flow machine and sell at just over 6 times operating cash flow. It also has an AAA rated balance sheet.
2. It has bounced twice off the sub $70 levels in recent weeks (See Chart).
3. XOM is selling for just over 8 times this year’s projected earnings and under 7 times consensus 2012’s EPS.
4. It is selling near the bottom of its five year valuation ranged based on P/E, P/S, P/B and P/CF. It also provides a decent dividend yield of 2.7%.
5. S&P has a price target of $103 on Exxon. Jefferies’ target is $80 and the median price target on XOM is $94.
Prognosis: Given Exxon’s P/E, growth prospects, dividend yield and strong balance sheet it is undervalued after its recent pullback. Buy.
Apple Inc. (AAPL) – “Apple Inc., together with subsidiaries, designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, as well as sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide.” (Business Description from Yahoo Finance).
Overview: Apple is the largest tech company by market capitalization ($330B) and is rapidly catching up to Exxon as the world’s most valuable company.
5 reasons to recommend AAPL at under $360 a share:
1. Despite its huge size, Apple is increasing revenues at a ridiculously rate. It will grow revenues by over 65% in 2011 and is expected to have revenue growth north of 20% in 2012. It has a five year projected PEG of just .62.
2. It consistently under promises and over delivers. It has crushed earnings estimates the last 8 straight quarters.
3. Apple is dirt cheap. Taking out its approximate $76B in cash and securities, AAPL is trading at less than 9 times expected 2012 earnings.
4. iPad is the unchallenged leader in the rapidly growing tablet market. HP’s recent decision to drop its tablet after just two months and RIMM’s problem with its Playbook are testaments to Apple’s prowess in this space.
5. Apple is way under analysts’ price targets. Goldman Sachs has Apple as a conviction buy with a price target of $480 and Credit Suisse is at $500.
Prognosis: Given Apple’s low valuation, stellar growth prospects and superior management; it is one of the most undervalued tech stocks available. Strong Buy.
Microsoft (MSFT) – “Microsoft Corporation develops, licenses, and supports a range of software products and services for various computing devices worldwide. The company’s Windows & Windows Live Division segment offers PC operating system that primarily includes Windows 7 and Windows Vista operating systems; Windows live suite of applications and Web services; and Microsoft PC hardware products.” (Business Description from Yahoo Finance).
Overview: Despite its stock price going nowhere for over a decade Microsoft is still the third largest company by market capitalization ($201B). It has pulled back approximately 15% in the last month and looks like a good value at these price levels.
5 reasons to find value in MSFT at $24 a share:
1. MSFT has strong technical support at the $24 level as it has bounced off this level several times in the last year (See Chart).
2. Microsoft has an AAA rated balance sheet, yields 2.7% and has grown its dividend over 11% annually over the past five years.3. It has easily beat earnings estimates each of the last four quarters and earnings estimates for 2011 and 2012 have moved higher over the last three months.
4. Microsoft is very cheap at just 8 times next year’s projected earnings and has over $4 in net cash per share on its balance sheet. It also has a five year projected PEG of under 1.
5. The median analyst price target on MSFT is $32.50. Credit Suisse’s target is $36.
Prognosis: Microsoft’s has a very low valuation, decent growth prospects, a great balance sheet and a solid dividend yield of 2.7%. Credit Suisse predicts it will earn over $4 a share in FY 2014. Strong Buy.
China Mobile (CHL) – “China Mobile Limited, an investment holding company, provides mobile telecommunications and related services primarily in the Mainland China. It offers various services comprising local calls, domestic long distance calls, international long distance calls, domestic roaming, and international roaming. The company also provides voice value-added services, including caller identity display, caller restrictions, call waiting, call forwarding, call holding, voice mail, and conference calls; customer-to-customer messages and corporate short message services; and mobile Internet access services.” (Business Description from Yahoo Finance).
Overview: China Mobile is the only foreign firm represented on the top five companies by market capitalization ($200B). It has held up better than the other four companies on this list during the market selloff over the last two months.
5 reasons to like CHL at $50 a share:
1. It yields 3.8% and has doubled its dividend payout over the past five years.
2. China Mobile has over 600mm users in a rapidly growing economy. It should also add the iPhone to its product line by end of the year.
3. It is projected to grow revenues north of 20% both in 2011 and 2012.
4. CHL is selling at less than 6 times operating cash flow and has almost $12 in net cash per share on its balance sheet.
5. The median analyst target on CHL is $53.
Prognosis: CHL has a high dividend yield, dynamic revenue growth and owns a fast growing emerging market. I believe it deserves a higher price target than consensus, which is balanced by my wariness about Chinese equities. Moderate Buy.
IBM Corporation (IBM) – “International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. Its Global Technology Services segment provides IT infrastructure and business process services, including strategic outsourcing, process, integrated technology, and maintenance services, as well as technology-based support services. The company's Global Business Services segment offers consulting and systems integration, and application management services”. (Business Description from Yahoo Finance).
Overview: IBM is the fifth largest company by market capitalization ($190B) and is the third tech company on the list. It has sold off 15% over the last month.
5 key value metrics for IBM at $159 a share:
1. It has handily beat earnings estimates over the last four quarters and consensus for 2011 and 2012 has risen over the past ninety days.
2. IBM has grown earnings by an average of 16% annually over the last five years and yet sells for a five year projected PEG of just over 1.
3. IBM is reasonably priced at under 12 times this year’s expected earnings and less than 2012’s consensus EPS.
4. The company sports an A+ rated balance sheet, has a low beta (.72) and provides a dividend yield of just under 2%.
5. S&P has a price target of $205 on IBM and the median analyst target on the company is $194.
Prognosis: IBM is selling at a low valuation and has a consistent record of beating earnings estimates. This is tempered by a murky outlook for business and government IT spending in the short term. Moderate Buy.
Source:seekingalpha