Top Undervalued Stocks To Buy For 2018

The New Home Company Inc. (NYSE:NWHM) is an undervalued homebuilder set for growth going into 2018. According to extensive modelling, it appears that the company is undervalued by about 18% at the current market price.

NWHM was recently named the Fastest Growing Public Company in Orange County by the Orange County Business Journal, based on revenue growth of 208% over the last two years. Despite this growth, the stock has only returned 6% per year since the IPO in 2014. This lags the S&P 500 by about 4%.

New Home Company is setting itself up for future growth, with numerous expansion plans currently in place. It was recently announced that the company will open two neighborhoods at Esencia at Rancho Mission Viejo. The Azure neighborhood features 79 homes priced from the high $300,000s to the mid-$400,000s. The Cobalt neighborhood features 72 paired homes that are priced from the mid-$500,000s.

Additionally, New Home Company announced the acquisition of 53 Single-Family Homes in Gilbert, Arizona. The homes will offer three to six bedrooms, three and one-half to five and one-half bathrooms, three- to four-car garages and up to 5,028 square feet of floor space. Pricing is expected to start in the $700,000s.

Top Undervalued Stocks To Buy For 2018: Coca-Cola Company (The)(KO)

Advisors’ Opinion:

  • [By Paul Ausick]

    The Coca-Cola Co. (NYSE: KO) traded up 1.15% at $44.90X. The stock’s 52-week range is $39.88 to $46.01. Volume was about 45% below the daily average of around 12.8 million. The company had no specific news.

  • [By Ben Levisohn]

    Coca-Cola (KO) is in the midst of a massive reorganization that should provide a boost its business down the road. Unfortunately, its earnings show a company that could remain stuck in place for a while.

    Getty Images

    Coca-Cola reported a profit of 43 cents a share, missing forecasts for 44 cents, on sales of $9.1 billion, beating expectations for $8.9 billion. Coke also said that earnings could fall 1% to 3% in 2016. The company said that it would cut its corporate staffing by about 20%, as it seeks to cut costs.

    Wells Fargo’s Bonnie Herzog sees “limited near-term upside” in shares of Coca-Cola. She explains why:

    Solid Performance in Most Markets Offset By Strong Headwinds in a Few Maintain Cautious Near-Term Outlook KO reported Q1 EPS of $0.43, below our/cons. ests. of $0.44. Broadly, KOs story and our cautious view of it remains unchanged. We see much to be encouraged by, including the renewed focus on growth, a new management team and reporting structure, strong performance of Coke Zero, and increased productivity savings targets (now $3.8bn by 2019, up from $3bn).

    However, we expect headwinds to remain very strong for the near-term, reflected in KOs underwhelming FY17/FY18 guidance which remains largely unchanged. Bottom Line We continue to believe that KO has a significant opportunity in FY18/19 following its Transition period to reaccelerate earnings growth and demonstrate the merits of its strategic overhaul. We therefore encourage l.t. investors to stay invested, but given substantial headwinds, we see limited near-term upside in the stock. We maintain our Market Perform rating and our $42 – $44 valuation range, but lower our FY17/FY18 EPS $0.01 to $1.88/$1.94.

    Shares of Coca-Cola have dropped 0.3% to $43.13 at 3:02 p.m. today.

  • [By Jayson Derrick]

    The Coca-Cola Co (NYSE: KO)’s bottom half of 2017 will be led by its new CEO James Quincey while the company will show “clearer evidence” of margin improvements and earnings per share upside as bottler re-franchising deals close.

  • [By WWW.THESTREET.COM]

    Keurig Kold machines – a similar partnership between the coffee maker and beverage giant Coca-Cola (KO) – hit stores in September 2015 at the hefty price of $369.99. The machines allowed consumers to create their own soda pods.

  • [By Ben Levisohn]

    We recently reached out to our retailer contacts to get an updated read on recent performance of Monster. Based on retailer feedback, we see a negative risk/reward for the stock ahead of Q4 results on 3/1 given: (1) soft scanner data, particularly in Dec & Jan as energy sales are definitely soft compared to other categories according to one retailer while another reported Monster started 2017 off horribly; (2) Java production issues persist; (3) poor retailer feedback on the rollout of Mutant continues in part based on the view that Coca-Cola (KO) is not executing on all cylinders and consumer reception of the product has not shown it to be anything great and certainly at this point is no threat to Mt. Dew; and (4) retailers modest outlook for Monster in 2017 (low- to mid-single digit growth on average).

Top Undervalued Stocks To Buy For 2018: Fiat Chrysler Automobiles N.V.(FCAM)

Advisors’ Opinion:

  • [By WWW.THESTREET.COM]

    The showstopper by far in the early going is Waymo’s self-driving minivan (pictured below) in partnership with Fiat Chrysler (FCAM) . Waymo’s ultimate mom-mobile, coming from a business that was spun-off from Google’s parent company Alphabet Inc. (GOOG) last month, is equipped with self-driving sensors and vision systems.

Top Undervalued Stocks To Buy For 2018: Equifax, Inc.(EFX)

Advisors’ Opinion:

  • [By Mark Fritz]

    Equifax Inc. (NYSE: EFX) blames its software for exposing the highly sensitive details of the credit company’s 143 million users. The software firm fires back and says it’s a people problem.

  • [By Lee Jackson]

    The top man at Equifax Inc. (NYSE: EFX) sold a big chunk of stock last week. CEO Richard Smith parted ways with 74,346 shares at prices that fell between $130.74 and $131.40. The total for the trade was set at $10 million. The stock ended the weekat $132.80. The 52-week range for the shares is $104.66 to $139.67, and the consensus price objective is $140.50.

  • [By Jayson Derrick]

    Investors can't necessarily be faulted for this line of thinking since the markets have seemingly ignored geopolitical tensions both domestic and abroad, terror attacks, a massive cyber breach at Equifax Inc. (NYSE: EFX), among many other concerning and alarming headlines, Cramer explained. While the world seems shaken to its very core, attacked on all fronts, major indices continue trading at new all-time highs as if everything is perfect in the world.

  • [By Money Morning News Team]

    In just the first six months of 2017, there were 230% more data breaches in the United States than the prior year. Some of the major U.S. companies that experienced breaches include Verizon Communications Inc. (NYSE: VZ), Microsoft Corp. (Nasdaq: MSFT), and Equifax Inc. (NYSE: EFX).

  • [By Dustin Blitchok]

    And the credit reporting bureau Equifax Inc. (NYSE: EFX) announced Sept. 7 that 143 million people could potentially be affected by a breach of the most sensitive data: names, Social Security numbers, birth dates, addresses, driver’s license numbers and credit card numbers.

  • [By Paul Ausick]

    Equifax Inc. (NYSE: EFX) posted a new 52-week low of $101.27 on Wednesday, down about 12.7% from Tuesday’s closing price of $115.96. The stock’s 52-week high is $147.02. Volume totaled around 12.6 million shares, about 12 times the daily average. The company is getting hammered following its announcement of a data breach involving records for 143 million Americans.

Top Undervalued Stocks To Buy For 2018: Murphy Oil Corporation(MUR)

Advisors’ Opinion:

  • [By David Tristan Liu]

    Murphy USA (MUSA) first caught my attention after Southeastern Asset Management acquired a massive stake ($668mm) in its former parent company Murphy Oil Corporation (MUR) in Q1 2013. One thing about Murphy Oil Corporation I noticed after an initial glance through their 10-K and annual report was its ownership of a valuable fuel and convenience retailer segment with high ROIC, valuable real estate, low CAPEX requirements, and relatively decent growth prospects that was under-followed and whose underlying value was concealed by the parent company’s core production and exploration business.

  • [By Joshua Bondy]

    Murphy Oil (NYSE: MUR  ) has already spun off its US retail operations into Murphy Oil USAandis exploring the possibility of spinning off its U.K. refining operations. Divesting its refineries will help direct excess cash to developing new fields.

  • [By Ben Levisohn]

    It wasn’t just Marathon that got clipped as the eight worst-performing stocks in the S&P 500 came from the energy sector, including Murphy Oil (MUR), which fell 6.7% to $25.87, Devon Energy (DVN), which slid 6.5% to $40.72, and Chesapeake Energy (CHK), which stumbled 6.1% to $4.94. No surprise, then, that the Energy Select Sector SPDR ETF (XLE) slumped 2.6% to $69.65.

  • [By Ben Levisohn]

    Today, it was all about oil afterOPEC “reached an understanding” on capping oil production. And that made Murphy Oil (MUR) the hottest stock in the S&P 500.

Qantas Airways Limited: A Good Company, Not A Great Price

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Qantas Airways (OTCPK:QUBSF) has struggled in the past, particularly in 2014 when the company recorded a $2.8 billion loss. Since then, the company has announced aggressive cost-cutting plans and is now 3 years into this revival. I believe Qantas is a good company and will continue to be a leader in the Australian airline industry; however, I don’t think the price of the stock offers a good enough margin of safety to make the leap and invest.

Industry Overview

The domestic airline industry in Australia is a duopoly with Qantas and Virgin Australia (combined market share of over 90%), each owning a low fare airline subsidiary Jetstar and Tigerair Australia, respectively. Over the past 5 years, the industry has seen steady declines in revenue, this is predominately due to the price war that Qantas and Virgin engaged in (which has since ended). However, many firms have been able to cut cost through layoffs, wage freezes, maintenance changes, and enjoying lower prices for jet fuel. This has resulted in higher margins and increased profits despite declining revenues.

Over the next 5 years, the industry can expect slow growth as domestic tourism is expected to increase as well as international trips to Australia. Margins may also continue to increase as planes, such as the Boeing 787 Dreamline become more fuel efficient. This growth is very minimal, estimated at 1.9% annual until 2023 (IBIS World).

Source: IBIS World

Comparing financial ratios with Qantas and other companies in the industry makes Qantas look appealing. Here I compared it to some of the other very large airlines in the United States and Singapore. All of these US airlines have something in common too, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) took a position in all 4.

(Source: IBIS World)

Source: Created by myself using data from Bloomberg

(Source: Created by myself using data from Bloomberg)

Investment Thesis

The reasons to invest in Qantas are rather simple, they have a massive market share of 64.8%, their historic brand has become iconic in Australia, and recent share buybacks and dividends show managements focus on shareholder returns.

Market Share

Their large market share is a huge advantage, since their next largest competitor, Virgin Australia, only has 27.2%, well less than half that of Qantas. Despite being so large, Qantas has been able to grow faster than the industry in several metrics. 1) Qantas increased its Revenue Passenger Miles at 2.68% annualized since 2010, compared to the industry at 2.12%. Qantas grew Available Seat Miles 2.7% annualized since 2008, compared to the industry at 2.13%. They have also managed to grow their fleet of planes substantially at 3.27% annually since 2007, adding 85 planes totaling to 309. Even with such a large market share, their earnings have been anything but steady, suffering losses in 2014, but turning around in the past 3 years.

Source: Macquarie Research, February 2018

(Source: Macquarie Research, February 2018)

The Brand: A Competitive Advantage?

One of the well-recognized competitive advantages is the power of a brand. Qantas has a deep history in Australia and is seen by 96% of Australians as iconic. They have been rated Worlds Safest Airline for 4 years running, as well as Best Catering, Best Lounges and Best Domestic Service for 2017. They are also listed as one of the top 10 companies to work for in Australia despite issues with labor several years ago. Furthermore, the dual brand strategy of Qantas and Jetstar allows for price discrimination to take place between wealthier and business-oriented passengers and more economical, tourists type passengers. No doubt, the Qantas brand is extremely strong in Australia and may offer a competitive advantage that would be difficult for a competitor to steal away from them. However, this is far from the branding of say a company like Coca-Cola (NYSE:KO), where customers often refuse to switch to a rival, PepsiCo (NYSE:PEP). It would be very easy for a passenger to choose a flight with competitor Virgin Australia if the price is better, timing is better, or the route is better (no layover). So, while the brand is strong, I dont think it necessarily keeps customers for the future. However, the Qantas Loyalty (frequent flyer) portion of the business is growing extremely fast, at 10% compounded annually since 2012 and is expected to sustain a growth rate of 7-10%. Members of these programs would face implicit switching cost to another airline because they wouldnt get their rewards or be able to use them.

Shareholder Returns

Along with the cost-cutting initiative taken 3 years ago, Qantas management has worked hard to increase shareholder returns. This has been achieved by aggressively buying back $1.2 billion of shares over the past 3 years. They have also announced they will purchase an additional $387 million of shares, representing 3.5% of the current shares outstanding. Share buyback has been paired with dividends of $0.14 for the past 2 years, making the payout ratio only 26.27%. Management has said this trend will continue, hoping to buy back shares in the upcoming years and increase their payout of dividends.

Source: Macquarie Research, February 2018

(Source: Macquarie Research, February 2018)

Valuations

To value the company, I completed 3 separate valuation models and took a weighted average.

Free Cash Flow to Firm

I calculated a WACC of 6.28% (Bloomberg say 6.2%) and grew the FCF at 3% over the next 3 years and then 2% thereafter. The growth rates are low and reasonable because the industry growth will be low as well. This gave me a generous value of $6.88 per share.

Dividend Discount Model

Using the same discount rate and growth rates as above, I increased their payout ratio to 40%, giving me a $0.22 dividend, which is still less than the $0.25 dividend they used to pay out, so I think its perfectly reasonable. This gave me a value of $5.22 per share. I confess a DDM is not the best, knowing that the dividend has been anything but consistent in the past, yet I expect it to increase in the future and wanted to model that in the value.

Multiples Model

Lastly, using a P/E multiple, I averaged the past 3 years’ P/E ratio to get 8.83. I averaged 8.33 with the current P/E of 11.44 and used the estimated EPS of $0.62 and came up with a value of $6.28.

Source: Made myself using data from Qantas 2017 Annual Report

(Source: Made myself using data from Qantas 2017 Annual Report)

Combining all models and weighting the DDM less (because the dividends are not consistent), I got a fair value of $6.31, proving only a 4.96% upside from the current price.

Its important to note the recent price appreciation of the stock since the past 12 months has yielded gains of 60.34% and even YTD gains of 19.25%. The stock is also well above the 100- and 200-day moving averages.

Source: Bloomberg Terminal

(Source: Bloomberg Terminal)

Conclusion

In summary, I think Qantas is a good business that will earn profits for years to come. However, the valuation is not compelling, and the recent price appreciation may mean that the train has left the station. Since growth is slow, and the industry is cyclical, I would recommend buying at around $5.00-$5.25 per share so as to have a larger margin of safety. There is a considerable risk buying an airline as the industry is sensitive to fuel cost, labor cost, and fierce competition. The 2-3% growth in the future is not enough reward to take on the risk unless you can buy at a discount.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is written solely for informational use. I am not offering investment advice as I have not considered myself as your fiduciary.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.