Looking for Value Stocks (BBY, DPZ, JKS)

After the markets have been on fire and after valuation concerns are starting to grow among investors in a world full of international strife, maybe it is time to consider value stocks.  We have run several screens and come up with about 20 companies in different business sectors and segments of the economy whose shares initially showed up as having the qualities that value investors look for.  All have some caveats, but they actually all still have some growth characteristics as well.

We are going to feature several more screens in the coming days and we are breaking these out sector by sector.  Our first list of feature stocks for value investors includes Best Buy Co. Inc. (NYSE: BBY) in retail, Domino’s Pizza, Inc. (NYSE: DPZ) in restaurants and casual dining, and JinkoSolar Holding Co. Ltd. (NYSE: JKS) in solar.  Admittedly, there are caveats on each of these.  That is generally the case when it comes to looking for value stocks.

Best Buy Co. Inc. (NYSE: BBY) is likely to feel like a painful lecture when you consider a value stock versus stock performance.  The stock has performed like a pig after its last two earnings reports and the fear is now that the PC sales are continuing to slow.  It carries Super-HD TV, PCs and peripherals, home appliances, smartphones, Apple products, and everything else.  It is just is stuck in the weeds as far as its growth and some of the cyclical benefits seem to be skipping Best Buy.  Any time that technology and retail stocks surface in a value screen, there is generally a reason. 

Sales grew during the recession but the fiscal Feb-2011 revenues of $50.27 billion compared to $49.69 billion a year ago and this figure is expected to be about $51.9 billion for the next year and almost $53.2 billion a year ahead.  The headwinds are obvious: average selling price in consumer electronics declines through time, PC sales are slowing, customers are going to the Apple stores, and on and on.

What Best Buy still has going for it is that analysts are actually seeing earnings growth due to cost management.  This is despite a drop in estimates as well.  The FEB-2012 and FEB-2013 fiscal earnings estimates from Thomson Reuters are $3.46 EPS and $3.69 EPS respectively.  If you blend the two forward years, Best Buy trades at only about 8-times earnings based on a $28.64 share price.  This stock seems to see lower share prices each week and its 52-week trading range is $28.09 to $48.83.  Its dividend yield is now 2.1% and analysts have a consensus price target of about $37.25 versus $28.64 today.

At $28.64 we can only assume and expect that guidance and sales will remain weak for some time and there may be risks to its earnings or revenues ahead.  Tech and retail are often skipped in the value screens, particularly if consumers curb shopping outings die to higher gas prices and due to higher prices on life’s staples.  It may take another wave of real PC upgrades before Best Buy gets back in favor and we have no ambition of that happening in the next quarter or two.  That being said, Best Buy could end up being one of those stealth value stocks that get overlooked.

Domino’s Pizza, Inc. (NYSE: DPZ) may be “America’s Pure-Play Pizza Delivery Giant” when it comes to getting cheesy pies into the homes of Americans.  Its move into chicken has also been a win, as have its other high-margin items.  Domino’s has a $1.1 billion market cap and operates a network of 9,351 franchised and company-owned stores in the U.S. and over 65 international markets. The company seems to just about always have something to offer families who want to order in the value category and higher up in the food prices for its pizzas. 

While it is not without flaws, Domino’s appears to be perhaps the cheapest way on operating metrics for value investors to stuff their faces just like its customers.  We expect the company to resume its dividend payments at some point in the near future, but value investors need to know that Domino’s has not been paying a dividend in recent years. If you are looking solely for dirt cheap book-value stocks in the retail food sector then we would say that Domino’s is not your best bet.  However, when you screen for the lowest P/E ratios in restaurant and retail food it is Domino’s that shows up time after time.  Thomson Reuters shows consensus estimates of $1.45 EPS for 2011 and $1.61 EPS for 2012, giving it a blended forward multiple of only about 12-times forward earnings.

Domino’s does has to worry about food inflation and transportation costs.  Here is the good news: so does every single one of its peers.  One thing that acted against Domino’s was when it took the leveraged payout method by paying out a special $13.50 cash dividend in mid-2007 back when companies were encouraged to either pay shareholders whatever they could at any price or to go find a private equity buyer.  If you can imagine it, shares are still short of the post-dividend prices back then.  The reason is the $1.45 billion in long-term debt after its 2007 recapitalization.  The caveat remains that Domino’s is dirt cheap on performance metrics but it is leveraged on its balance sheet.  If it was dirt cheap on the books and in financial performance, it would be taken private.

The stock trades at $18.60 and its 52-week trading range is $10.66 to $18.75.  Now the company has built back up to $169.6 million in cash.  It also carries a $1.45 billion long-term debt load that it has been bringing down.  If you can stomach another three-years to four-years for an outlook (remember, this is value screening), then the valuation on the books will also look much better and that dirt cheap P/E ratio will look more and more like a normalized company in comparison.  Analysts have a mere $19.00 price target today, but that is likely to improve as the company grows cash and pays down more debt.  Value in food, with caveats. 

JinkoSolar Holding Co. Ltd. (NYSE: JKS) is going to look and feel like a hard sell as a value stock considering that solar is still supposed to be thought of as growth rather than value.  This is a solar GARP call, for growth at a reasonable price.  Actually, a very reasonable price.  By now you already know many of the woes in the solar space.  JinkoSolar’s numbers make it perhaps the cheapest of the cheap when it comes to solar shares.

After digging through the valuations it was shocking to see that JinkoSolar has a forward P/E of only about 3.5-times for 2011 and it is expected to have modest earnings and revenue growth in 2012 with a multiple of about 0.5-times expected revenues as well.  The company is vertically integrated in multiple aspects of solar and is far from being solely reliant upon Chinese business. 

Another gain for JinkoSolar is that despite being extremely volatile it has beaten its earnings expectations.  Its last quarter was an unbelievable earnings beat on record shipments.  We have also seen analysts raising estimates now that it the company has raised 2011 guidance.  The 2012 Consensus Estimate jumped to $7.70 form $5.96 per share over the last two months, so analysts are seeing more upside in long-term earnings.  The company trades at about 1.3-times book value and trades well under 1-times projected revenues while still expecting earnings and revenue growth. 

We do not want to go out on a limb and call it the best solar player, but it may have the most opportunity when it comes to an underlying value cushion.  At $25.76 it has a 52-week trading range of $8.23 to $41.75.

There is a big caveat here and that is the “China Syndrome” where recent IPOs and reverse merger companies are under more scrutiny.  So now you have the caveats, but it is hard to not recognize that JinkoSolar is a cheap stock.

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Again, having the term “value” does not keep losses from happening.  CHeap stocks often get cheaper. Still, when it comes to M&A and it when it comes to long-term investing it is the value segment that often outperforms the market and which can hold up better in bear markets.  If everything was running perfect or if there were no caveats then these would all be classified as another investment category. 

As one investment manager said at The Value Investing Congress when asked about how she starts her screens for finding value stocks, “Actually, I usually start my screens by seeing which stocks have been hitting 52-week lows for a while.”  There would not be a value category if the growth trajectory was never interrupted and if problems never arise.

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JON C. OGG