This week we bring reviews of “value stocks” for long-term investors by 24/7 Wall St.   Monday’s focus is mostly on large-cap stocks that are easily recognized and which have large positions in their markets.  Generally speaking, value stocks require sub-market P/E ratios (under 15) and these often focus around cash and/or book value.  Our “value stock” screens are starting the week out with shares of Dell Inc. (NASDAQ: DELL) in tech and computers, Kimberly-Clark Corporation (NYSE: KMB) in consumer products, and Quest Diagnostics Inc. (NYSE: DGX) is healthcare diagnostics.

We always have a focus on dividends and the ability to grow payouts.  In each of these we have given forward implied P/E ratios, and given more financial data and additional color where applicable.  The one issue we always have to throw out in value stocks is that value stocks often lack momentum or catalysts to drive higher share prices.  These generally require time and patience to pan out.

Dell Inc. (NASDAQ: DELL) is managing to turn itself from a former growth PC player into a value stock, and its shares are holding up better than rival Hewlett-Packard Co. (NYSE: HPQ).  Being in the PC business now almost seems so 1990s and that is why both Dell and H-P have been trying to migrate into new IT/services and other data center and enterprise efforts. There was a time Michael Dell was considering trying to take the company private.

You already know that the excitement in the PC and consumer electronics segment remains Apple Inc. (NASDAQ: AAPL).  Dell has still been managing to beat its earnings expectations in each of the last four quarters and Thomson Reuters has earnings estimates of $1.70 EPS for its fiscal year January-2012 and $1.76 EPS for January-2013.

Unlike H-P, Dell is actually close to 52-week highs.  At $16.37, its 52-week range is $11.34 to $16.80 and shares are up close to 10% in the last two months.  The company has some distractions in its smartphones and it is not considered a huge tablet-PC winner yet.  On a forward earnings blend, Dell trades at only 9.5-times forward earnings.  Its market cap is $31 billion and the company has nearly $15 billion in cash and investments with which it can make acquisitions, buy back stock, or decide to finally start paying a dividend.  If Cisco is a dead stock and can finally start paying a dividend, Dell can as well.

Thomson Reuters has a consensus value of $16.67 for the stock, but this could go back up to $20.00 if Dell wants to be more shareholder friendly (i.e. dividends and buybacks). The biggest concern about both Dell and H-P here is that earnings are coming this week.  H-P remains cheaper on forward earnings but the company is considered to be in more disarray with management changes.

As with most value stocks, there is rarely a hurry and being a patient investor can always be more prudent than piling into shares pre-news just because someone says “there is value in the shares.”

Kimberly-Clark Corporation (NYSE: KMB) remains a value stock and remains our top pick in the consumer products space.  This is still a stock we think investors should own for the next decade and you get paid over 5% in dividend yields here even after the appreciation here has shares back close to all-time highs.

The consumer products sector has been offering some growth for investors, but it mostly acts as a defensive position that can hold up if and when the stock market weakens again. One issue that has kept the sector in a bit of a cloud, despite its popularity and performance, is the high dollars that are going for in-store promotions as each company fights for better store placement and for more prominent shelf space. 

So far consumer product companies have managed to stave off many of the inflationary cost pressures.  Making 12 ounce bottles into 11.5 ounce bottles may be the answer.  This cost pressure remains an issue that will likely still remain in the headlines ahead.  We are more concerned with the in-store promotion costs than we are the cost pressure.
 
Thomson Reuters has estimates at $4.85 EPS for 2011 and $5.25 EPS for 2012.  At $68.29, a blended 2011 to 2012 estimate of about $5.05 EPS gives an implied forward P/E ratio of 13.5-times earnings.  The yield and the company’s more shareholder-friendly model make us believe that there is more upside to the $69.77 consensus price target offered by Thomson Reuters.  We have closer to an $80.00 fair value, and when you add in the highest dividend by far you end up with a great company trading at valuations that are more than fair.

Quest Diagnostics Inc. (NYSE: DGX) might not screen out as value on the current trailing 12-month P/E ratio, but there is value here in this diagnostics player.  Healthcare is no longer as feared as Obamacare has actually not crippled as many segments as feared.  If one area is going to remain afloat in the healthcare treatment segment it is diagnostics. Its dividend is less than 1% and that $0.10 quarterly payout has been in place since early-2006, but we expect that to grow through time and come more in-line with peers.

Thomson Reuters has estimates of $4.33 EPS for 2011 and $4.87 EPS for 2012.  This is more than 10% earnings growth but only on about 5% revenue growth.  The boost here that remains as unlocked and hidden value (for future growth) is Quest’s acquisition of Celera Corporation (NASDAQ: CRA) as a hidden value in the $671 million acquisition.  The estimates will not be greatly changed for a few years on Celera’s addition to Quest, but this is a key future growth mechanism that is being acquired on the cheap.

The Celera deal offer has been extended and is still expected to close, and Celera has no real debt and carried over $325 million in cash and liquidity on its books.  After Celera is integrated, Quest has a broader personalized genetic testing business for heart condition, cancer and more via genomics and proteomics.  Celera could possibly become a multi-billion value in the coming decade.

Quest recently paid $241 million in a settlement to get a Medicaid suit behind it, but it also reaffirmed its adjusted earnings targets. While the company has a larger debt load with over $3.5 billion in long-term debt versus a $89 billion market cap, Quest’s earnings ahead should be more than sufficient to offset leverage.  Shares closed last week at $57.40, its 52-week range is $43.38 to $59.39, and Thomson Reuters has a consensus share price target of $64.28.  A combined 2011 to 2012 blended earnings estimate puts a forward earnings multiple at only about 12.5-times expected earnings.

Again, having the term “value” does not imply immediate gains.  The market has enjoyed a great recovery and there is a saying that “cheap stocks often get cheaper” if there are no catalysts. 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 when the markets head south. If everything was running perfectly inside the companies 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 of the growth trajectory was never interrupted and if problems had not arisen.

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JON C. OGG

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