A new report from Jefferies updates the firm’s top new value stocks ideas for this week. While many don’t look like traditional value companies, the analysts have screened the firm’s universe for Buy-rated stocks that fit in the value mode. That typically can mean a valuation that is compelling versus the current stock price.
Ally Financial
This is the old financing arm of GM, which was known before the Great Recession as GMAC. Ally Financial Inc. (NYSE: ALLY) has been rebuilt into a stronger and more solvent Internet-focused bank with no brick-and-mortar locations. Its customers do their banking solely through the bank’s website, its mobile application and automatic teller machines.
The Jefferies analysts feel that in comparison to peers — few actually are structured like Ally — the stock is very cheap. Trading at a low 8.91 times estimated 2016 earnings and at less than one times book value, the analysts feel that there is room to run. Most on Wall Street feel that the stock should trade more like 1.25 times book value. And they feel that the bank is moving away from a dependence on GM and into a more balanced operating structure, which is good for long-term strategy.
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With the capital structure optimized and management having diversified the originations platform ahead of expectations, Ally Financial stock has tremendous value at current levels.
The Jefferies price target for the stock is $28. The Thomson/First Call consensus target is $27.76. Shares closed on Monday at $20.85.
Frontier Communications
Jefferies likes this rural local exchange carrier for the long term. Frontier Communications Corp. (NASDAQ: FTR) offers broadband, voice, video, wireless Internet data access, data security solutions, bundled offerings, specialized bundles for residential customers, small businesses and home offices and advanced business communications for medium and large businesses in 28 states. Frontier’s approximately 17,800 employees are based entirely in the United States. Wall Street analysts note that the company has taken broadband share in almost 80% of operating markets last year.
The company got final approval in May for an $8.5 billion acquisition of Verizon’s wireline operations that were providing services to residential, commercial and wholesale customers in California, Florida and Texas. The sector-wide overhang is the $8 billion bond deal the company has to complete to fund the purchase. In anticipation, bond investors have widened out the bond at Frontier and across the sector, which has in turn pressured the stocks.
The Verizon assets should be accretive and help the company grow free cash flow, and they could help the company begin to grow the dividend again. In addition, the government’s CAF-II plan to increase broadband access in rural areas should help boost sales and EBITDA.
Frontier investors a paid a massive 8.05% dividend. The Jefferies price target is $6, and the consensus target is $6.56. Shares closed on Monday at $5.22.
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Hewlett-Packard
This old-school tech stock has been sold off all year as investors feel that the PC sales slowdown could continue to hurt earnings. Hewlett-Packard Co. (NYSE: HPQ) stock is down a whopping 25% year to date and trades at a very low 8.2 times 2015 estimated earnings. Some Wall Street analysts feel that weak PC demand could continue to negatively affect revenue and free cash flow. The company again posted so-so earnings last week. Profits declined 13% in the quarter, further promoting a company split in order to reduce costs. Hewlett’s net income dwindled to $900 million from $1 billion in the same quarter last year. Total sales for the company decreased 8% to $25.3 billion.
The company is focused on splitting into two entities, which the Jefferies analysts feel will be a very positive catalyst event. One company, to be named Hewlett Packard Enterprise, will focus on selling technology like servers and data center gear to businesses. The other, to be called HP, will sell printers and personal computers. The Jefferies team feels that the company has among the least downside risk of the large IT hardware companies and suggest investors buy stock before the split.
HP investors are paid a 2.60% dividend. Jefferies has a very solid $40.50 price target, while the consensus target is $37.74. Shares closed Monday at $27.04.
Noble Energy
Jefferies upgrades the stock to Buy from Hold and continues to expect growth, as last week the company increased production guidance for the third time this year, without an increase in capital expenditures. Noble Energy Inc. (NYSE: NBL) has most of the firm’s production in the form of natural gas, and that certainly helps to hedge against falling oil prices, especially when we have brutal winters and very hot summers. Noble is also one of the many American firms expected to benefit when Mexico opens the door for exploration and production from outside companies for the first time in 70 years.
The company declared its Aphrodite natural gas reserve off Cyprus commercially viable earlier this year. Cyprus discovered offshore gas in 2011 and is seeking to develop it and bolster an economy that relies mostly on tourism, business services and shipping. The analysts note that Israel remains an overhang, and they still have concerns about longer term expansion, but the valuation at current trading levels is compelling.
Noble investors are paid a 2.33% dividend. The Jefferies price target is $37, and the consensus figure is at $46.92. Shares closed trading Monday at $30.90.
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While it is anybody guess what the Fed will do, shifting to stocks with better upside potential makes sense as it is a very good bet that the volatility index will stay elevated for some time.
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