Over the last several trading days, there have been five companies in the Low P/E Bin that have ramped up after some time spent in a trading range. Below is a list of them, with a capsule description for each. I should note that the stats I've calculated for any foreign company uses its home GAAP for the raw numbers.
Banco Bilbao Vizcaya Argentaria SA: This bank has operations centered in Spain, Portugal and Latin America. Followers of the world economy know how bad the Spanish economy's had it recently, but things may be finally turning around in that country. Bilbao is classified as a money center bank. As of Mar. 31st, its book value was 7.27 euros per share, or $10.24 at today's exchange rate. It closing price today is $13.60, pricing Bilbao at about 133% of book value. Its 1Q '09 earnings were 36.5% below 1Q '08's. Despite a 2008 earnings slump, Bilbao's 9-year EPS growth, in Euros as calculated by logarithmic regression, is 14.83% for the years 2000 to 2008. Its nine-year ROE is 21.49%. Nine-year average EPS is 1.01 euro, or about $1.42, making Bilbao's adjusted P/E ratio (for 9-yr average earnings per share) 9.58. The fact that this company is in the Bin indicates that the market expects Bilbao to fall off the growth track for one more year. As the 1Q results above indicate, it already is doing so to some extent.
Barclays plc: After rallying from March to early May, and continuing to rally after mid-May, this company was hit by Abu Dhabi's SWF's announced sale of a large stake in the company. As of today, the stock managed to close above the pre-sale high for the first time. Barclays is another foreign money center bank, one whose earnings growth is more modest than Bilbao's. Barclay's 10-year EPS growth rate, in pounds as also done by logarithmic regression, is 9.03% for the years 1999 to 2008. Its 10-year return on equity, also in pounds, is 17.29%. Its 10-year average EPS is 0.42 pounds, or 69 US cents. So, its P/E ratio, using 10-year average EPS for the 'E', is a rather high 30.0. Its cash flow position for 2008 was much better than for 2007: free cash flow was 30.769 billion pounds. Operations cash flow net of all investing-cash-flow expenditures was 24.961 billion pounds, or more than eight times the dividend requirement. Despite this cushion, Barclay's CEO has announced that dividends will be less certain in the future than in the past because of the financial crisis. Barclays has slipped from its growth track before, in 2001 and 2002, but the total fall on EPS from 2000 to '02 was only a 17.5% drop over those two years. Although 2008's second-half income was slightly above the second half of '07's, 2009's may contain a less-then-cheery surprise.
Cal-Maine Foods Inc.: This stock leapt up in mid-June after a fund manager praised it in Barron's. Since then, it's edged upwards to $25: the price action settled on an increasingly narrow range until today's solid breakout to $27.00. Cal-Maine produces shell eggs, the regular kind and the more premium free-range variety. Its earnings in the last ten years have been very volatile, with four years of losses between 1999 and 2008, but its 10-year return on equity is 21.00%. Cal-Maine's ten-year average EPS is an even dollar, making its P/E ratio for its 10-year average EPS a rather high 27. As an example of that earnings volatility, FY 2008's EPS was more than four times FY 2007's. The diluted EPS for 3Q FY '09, which ended Feb. 28th, dropped 46.5% with respect to 3Q FY '08's. Owners' earnings, though, were 2.87 times dividend requirement for the first three quarters of '09. Although its earnings seem ripe for a fall to a more normal level, its 6.40% dividend still has a large margin of safety with respect to free cash flow.
Deluxe Corporation: This one, I've mentioned in a few earlier posts. Of all the stocks in this list, Deluxe is the one whose stock price got rolling the earliest: five trading sessions ago. It's also the one whose leap is the greatest: 33.6% in that week. What got it rolling was a favorable analyst's report, incorporating upwardly-revised earnings guidance from the company. Prior to that announcement, from mid-June, Deluxe was in a trading range that was lower than the one established from the beginning of May to June 15th. Deluxe specializes in paper products for office use, primarily custom-printed cheques. It's one of those companies that seems to be addicted to share buybacks, to the point where its return on shareholder's equity is often in the triple digits. Despite that practice, Deluxe's 10-year continuing-operations EPS growth rate from 1999 to 2008 was below zero: -1.75%. On the other hand, its 10-year average EPS (including discontinued operations) is $2.81. Even at today's elevated price of $16.55, its P/E ratio using that 10-year average is 5.89. Its standard deviation for its 1999-2008 annual earnings is 64 cents; its lowest annual EPS in that timeframe was 2006's $1.95, a fall of 37.1% from 2005's $3.10. Its diluted EPS for 1Q '09 was 53.7% lower than 1Q '08's, but its guidance suggests that 2Q '09's drop will be about 14% from 2Q '08's. Deluxe's cash from operating activities for 1Q '09 was actually more than double 1Q '08's; so was free cash flow. 1Q '09's cash flow from operations net of all investing cash flow was about four times the dividend requirement for the quarter. Its current yield is 6.04%, and its 25 cents/quarter dividend has stayed steady since 3Q '06's cut from 40 cents. This is the same stock I've been pooh-poohing as it shot up, as I believe it will retrench in the near future.
Whirlpool Corporation: This company also has erratic earnings, although its 10-year EPS growth (as measured, like all of the above, by logarithmic regression) is a respectable 12.19%. Whirlpool is the well-known appliance maker; its presence in the Low P/E Bin is because of housing-crash- and recession-related fears for its earnings. Like all of the above companies save Cal-Maine, Whirlpool's annual EPS for 2008 was below 2007's. It also has the longest-lasting trading range of all five. It hovered between $40.50 and $44 from mid-May until the beginning of July, when its closing price snuck up to $44.79. The trading range held, though, until two days ago when it closed above $45. Since then, it's been steadily rising to today's close of $49.87. Its 10-year-average EPS, counting discontinued operations, is $4.16; using those earnings in the denominator gives a P/E ratio of 11.99. Like Bilbao, Whirlpool's 10-year-average P/E ratio is below its 10-year EPS growth rate. Its 1Q '09 earnings did drop 25.4% from 1Q '08's; its 1Q '09 cash flow from operations was negative, even if less so than 1Q '08's. Even though a full 43-cent dividend was paid in each quarter of 2008, free cash flow for the entire year was negative. It had recourse to the debt market to the tune of $515 million for that year, although more than that amount was borrowed in 1Q '08. 1Q '09's net borrowings was less than 1Q '08's, suggesting that Whirlpool may be slowly getting over its cash squeeze. Nevertheless, there is no free-cash-flow margin of safety for its dividend at present.
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Now that the roster of leapers is finished, I would like to call attention to a stock that did the opposite last Monday, from which it has not recovered. The company is Sabine Royalty Trust; it's an express trust that collects income from its owned royalty interests in various oil and gas properties ranging from Florida to New Mexico (and some in Oklahoma.) Distributions are paid out monthly. Given that it's a royalty trust, it's return on unitholder's equity is meaningless - but its net distributable earnings have grown at a 13.1% rate over the last ten years. Its 10-year average for same is $3.16; at today's price of $40.17, its 10-year-average-earnings P/E is 12.71. I mention this stock because it closed at $45.44 last Friday, making for a 3-day drop of 11.6% since then. Almost all of the drop took place on Monday, the same day that it went ex-distribution. July's payout was 29 cents, a jump of 37.9% from June's 18 cents, so it could be argued that the market's been discounting a return to a more normal payout given the fate of oil's price recently. There's been no news on (or from) the company to explain the recent drop in its share price. I point to this company because its stock endured a similar plummet in mid-May, when it went from $42.92 to $37.27 in a week. Within a subsequent week, though, the stock rebounded to $41.45 and it kept rising to $43.05 two days later. Since then, it's hovered between about $43 and $45 until three days ago. The May drop was mysterious then, and the current one is mysterious now. Although a stock should not be bought solely because it's on sale, I offer the opinion that it is on sale as of now. Sabine's current yield is 8.67%, although the assumption that the average distribution over the last five months will be equal to the average for the next year gives a much smaller suggested yield of 6.75%.
Disclosure: I put some Sabine into the actively-managed Marketocracy mock fund I run. As should be indicated by my grousing about one of them, none of the other five are currently in that mock fund.
The Dividend Signal
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