Finding stocks trading below book value per share can sometimes reveal companies that are undervalued and merit further analysis. In accounting jargon, book value is the total assets minus the liabilities of a business and is sometimes referred to as equity.
The catch is that these companies generally don’t have a reputation for generating high returns, which is one of the reasons they trade below their net asset value. This is currently the case for the owner of Calvin Klein HPV (HVP 5.35%), AT&T (T 0.63%)and World Paramount (PARA 1.82%)all of which are trading below their book value at the time of writing.
All three stocks significantly underperformed the S&P500 index over the past five years, which is one of the reasons the market isn’t too excited about them. But a few notable investment experts think these three stocks are poised for a rebound. Let’s dig a little deeper and find out why they might be undervalued.
PVH is one of the largest apparel companies, with $9 billion in revenue. In 2021, Tommy Hilfiger accounted for 51% of the business, while Calvin Klein accounted for 40%. Other brands under its umbrella are Warner’s, Olga and True & Co., which contributed to the balance of revenue.
The company enjoyed a strong recovery last year from the pandemic, with revenue jumping 28% year-over-year. Calvin Klein was the top performer, with revenue up 39%. But what stands out is the improvement in profitability.
PVH reported adjusted earnings per share of $10.15, compared to $9.54 in 2019. This translated into a new high of 12% return on invested capital. Before the pandemic, the company consistently generated a return on capital of less than 10%.
In the first quarter, a handful of fund managers, including Harry Burn of Sound Shore, Viking Global Investors and Lee Ainslie of Maverick Capital, bought shares.
In April, management presented its PVH+ strategy to improve the company’s growth and profitability over the next three years. PVH is targeting $12.5 billion in revenue by 2025, with operating margin increasing to 15% and free cash flow reaching $1 billion or more. To achieve these goals, management plans to focus on penetrating large markets that demonstrate the greatest consumer demand for its brands. The company also plans to create a digital-first operating model while improving operational efficiency to be more competitive.
Clearly, if management executes, and it appears previously rated value investors think they will, the stock could be a bargain at 0.78x book value. On a price-to-earnings (P/E) basis, the stock is trading at a multiple of 6.8 times the 2022 earnings forecast. That’s really cheap, given that the average P/E ratio of the most companies historically vary by an earnings multiple of 15 to 20.
Inflationary pressures are expected to impact PVH’s business this year, but that’s why long-term investors can buy the stock at a very cheap price. PVH is an interesting clothing stock to consider, especially given its big clothing brands like Calvin Klein that have been around for a long time.
AT&T is another potentially undervalued stock. David Rolfe of Wedgewood Partners and Lee Ainslie bought the stock in the first quarter. The stock trades at a low price-to-earnings ratio of 8.2 based on 2022 estimates and a price-to-book ratio of 0.89.
The reason AT&T may deserve a higher valuation in the next few years is the steps management is taking to extract more value from the company’s assets. Over the past year, management has sold non-core businesses, created a new standalone company for DirecTV, and completed the merger of WarnerMedia and Discovery to form Discovery of Warner Bros..
These actions allowed management to reduce AT&T’s net debt by about $40 billion in April. Debt reduction and the sale of non-core businesses are two things investors generally applaud, but so far the market isn’t giving AT&T a higher valuation. This obviously has a lot to do with worries about the economy and fears of an impending bear market. This certainly does not reflect the company’s latest results.
AT&T’s wireless mobility and broadband businesses are doing well. Excluding recent asset sales and the impact of the WarnerMedia transaction, revenue grew 2.5% year-over-year in the first quarter. AT&T saw its highest level of data traffic in 2021, and it also reported its best quarter of postpaid phone network additions in more than a decade during the first quarter.
All told, AT&T appears to be in a stronger position following recent financial actions by management. This should free up resources to invest in the future of 5G and broadband and generate better returns for shareholders.
At the current share price of $20.99, the stock sits just above its 52-week low of $16.62 and could be a great buy for the dividend, if nothing else. . AT&T paid out 56% of its free cash flow as dividends to shareholders last year. The dividend yield is currently above the average of 5.22%.
3. Global Paramount
ViacomCBS changed its name to Paramount Global earlier this year, and alongside that, the CBS All Access streaming service was rebranded as Paramount+. Whereas netflix lost 200,000 subscribers in the first quarter, Paramount’s direct-to-consumer business added 6.8 million new additions to its streaming services, also including Pluto TV results, bringing total subscribers to 62 million.
The stock trades at 12 times forward earnings estimates for 2022 and just 0.90 times book value. The market focuses on weak results in all areas. While streaming revenue grew 82% year-over-year in the first quarter, Paramount’s television media and theatrical release revenue declined. Total revenue decreased 1% year over year.
Nevertheless, Warren Buffett Berkshire Hathaway purchased 68.9 million shares in the first quarter. Keep in mind, given the stock’s relatively small position in Berkshire’s stock portfolio, it may have been one of Buffett’s secondary investors – Todd Combs or Tedd Weschler – who bought the stock. ‘stock.
Whichever Berkshire guru invested in Paramount, it makes sense for a reason. Besides rating, Paramount can monetize its content in a number of ways. It can make money from box office releases, paid streaming subscriptions, and ad-supported plans. The company also owns several top cable networks, such as MTV, Comedy Central, and Nickelodeon, and of course, it does well during NCAA tournament season on CBS.
For Paramount+, management believes that the benefit of leveraging different monetization levers – advertising and paid subscriptions – will lead to potentially higher average revenue per user over time compared to services that only offer plans. paid subscription.
Economic headwinds could put pressure on Paramount Global’s cable networks, which depend on a healthy advertising market. But worries about the near-term direction of the economy are giving long-term investors a chance to buy a top entertainment provider at a ridiculously low price.