There are very few value opportunities left in this market. However, there are still opportunities out there to be found if you put in the work and are willing to take on the risk.
Surprisingly, there is still value to be found in the large cap. section of the market. Using a simple value screening process, it would appear that five large cap value opportunities look to be ripe for the picking.
Screen criteria used for finding value
The screen criteria used were:
- A market cap of over $100 million
- P/B of less than 1.5
- A TTM P/E of less than 15
- Return of equity greater than 10% per annum on average for the last ten years
- Net debt to EBITDA less than 0.5x
- Dividend payout of more than 1%.
Here are the results:
|Company||Market Cap.||P/B||P/E||Net Debt/EBITDA||ROE 5yr average||Yield|
|KBR, Inc. (NYSE:KBR)||$2.7bn||1.3||14.5||-2.5||15.3%||1.2%|
|Diamond Offshore Drilling Inc (NYSE:DO)||$5.0bn||1.5||14.4||0.3||22.5%||7.0%|
|HollyFrontier Corp (NYSE:HFC)||$7.2bn||1.5||12.9||-0.4||14.2%||6.6%|
|General Motors Company (NYSE:GM)||$41.1bn||1.3||11.5||0.4||86.7%||2.9%|
|Chevron Corporation (NYSE:CVX)||$170.9bn||1.5||11.1||0.1||17.0%||3.4%|
So what’s the story behind these companies?
Engineering firm KBR, Inc. (NYSE:KBR) is bouncing around 52 week lows, following a damming company-issued press release. The release announced that KBR’s Audit Committee had determined that the company’s financial statements for the fiscal year ended December 31, 2013 contained material errors. These errors extend into the hundreds of millions and SEC filings will need to be restated. Lawsuits are coming in thick and fast.
Diamond Offshore Drilling Inc (NYSE:DO) looks to offer potential value, as does much of the offshore drilling industry. However, analysts at Barclays have questioned whether or not these drillers have become a value trap, there is the possibility that EPS forecasts could be revised downwards by 63% from current levels. Diamond’s forward P/E could be revised upwards from the current 9.8x to 26.2x; making the driller look expensive rather than valuable at the current price.
HollyFrontier Corp (NYSE:HFC) is one of the better picks in the refining sector and the current valuation looks attractive. During the five year period from 2009 to 2013, HollyFrontier reported an average refining margin per barrel of $4.76.
The company’s closest peer, Marathon Petroleum Corp (NYSE:MPC), only reported an average refining margin of $3.7 per barrel during this period; that’s a full 23% lower. The industry leader, Phillips 66, reported an average margin of $2.9 during this five-year stretch.
During the period 2009 to 2013, HollyFrontier reported a ROIC of 13%, Marathon Petroleum reported a similar figure, Koninklijke Philips NV (ADR) (NYSE:PHG)’ ROIC came in at 11%.
General Motors Company (NYSE:GM), despite being plagued with recalls and bad publicity just posted post US new car sales 12.6% ahead of last May’s level, outpacing the wider industry’s rapid growth. The valuation looks attractive and any worries about recalls seem to be overdone.
Meanwhile, Chevron Corporation (NYSE:CVX) might look cheap now but the company is set for rapid growth during the next few year. The company is planning to drive up steam output higher by more than 20% through to 2017 as a number of huge projects come online. With the lowest P/E in the group and a 3.4% yield, it might be worth the wait.