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Five more stocks trading at less than book value

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April 16, 2009 – Comments (2) | RELATED TICKERS: DOW , DUK , ALL

A couple of days ago, I blogged about NV Energy, a power company that is trading below its book value (see post: Yum, a power company that's trading below book value).  Today I came across a great Bloomberg article by John Dorfman that talks about five more companies, big ones, that are currently trading for less than their book values.

Duke Energy, Allstate, Dow Ace Book-Value Test: John Dorfman

We all know that book value is not perfect.  As someone pointed out to me the other day, it does not necessarily reflect the current real world value of a company's assets.  That is very true.  It certainly should not be the only criteria that you use to select a stock to purchase it is a great metric to use when searching for undervalued companies.

In the article, Dorfman states that In "normal times" (whatever that is) he looks for companies that have a price-to-book ratio of less than two, but that in today's market he prefers companies that have ratios of 1.5 or even better less than 1.

Here are the five stocks that Dorfman mentioned in the piece:

1) I'll start with one that I have a personal stake in, Dow Chemical (DOW).  No I do not own Dow common stock.  Several months ago I purchased a decent position in the company's bonds.  Specifically I own Dow Chemical's 7.0% Bonds Due 11/15/13 and Dow Chemical's 6.0% Bonds Due 10/01/12.  When I bought them they had yields to maturity of around 10%.

Almost everyone is familiar with Dow Chemical and what they do.  I personally don't like the company's common stock and I would be very hesitant to buy it until one of the world's worst CEOs, Andrew Liveris, is booted (man I can't stand that guy, he's terrible). 

Having said this, Dow's stock is pretty darn cheap right now.  After peaking at over $55 in 2005, the company's stock is down to around $11/share (it is slightly higher than that after the rally over the past several days), which amounts to only 6 times earnings and 0.8 times book value.

The massive drop in the price of oil from nearly $150 last summer to around $50 today should help ease Dow's raw material costs.  Furthermore, Dow is making an effort to pay down its massive slug of debt by taking actions like attempting to sell its Morton Salt division and slashing the dividend on its common stock.  That good news for bondholders like me.  The more debt the company pays down, the more its bonds are worth.

2) Duke Energy (DUK) - Anyone who reads my blog knows that I like electric utilities.  Duke Energy is a power company that is based in the Southeastern U.S.  It has operations there, in the Midwest, and even in Latin America. 

I don't like the fact that Duke has a ton of coal plants, but at least it has nuclear assets as well.  One major plus about the company is it has a reasonable debt load for a utility, only 41% of its total capital.  Plus, here's my favorite part...Duke pays a solid 6.6% dividend.  Any cap and trade or other sort of carbon tax would likely be a net negative for DUK, but at 0.9 times book value and 11 times earnings the company is so cheap at this point that it's worth a look.

3) Allstate (ALL) - Everyone probably knows what Allstate is as well.  For those of you who live in a cave, it is the United States' largest publicly traded auto and home insurance company.  At around $24/share its stock is down significantly from its $65 high at the end of '06.  It is currently trading at slightly less than book value and 7 times earnings.  Insurance companies have taken an absolute beating lately.  I don't personally know much about Allstate's operations, but Dorfman likes the stock and its 3.3% dividend (which be believes is fairly secure) at this level.

4) Next up is Time Warner (TWX) - It is a large media company that has assets including magazines (Time, Fortune, People & SI), movies (Warner Brothers & New Line Cinema), cable TV channels (HBO, Skinamax, Cartoon Network, TBS, TNT), and internet (AOL...relch...blach...excuse me I just threw up in my mouth a little bit just thinking about how bad an acquisition that was).

At only 7 times earnings and 0.6 times book value Dorfman believes that Time Warner is "a tangerine, pieces of which can profitably be spun off or sold."  I'm not so sure about that, but a lot of value buffs like the stock at this level.

Don't confuse TWX with TWC, the company's recently spun-off cable assets.  I shorted TWC in CAPS right around the time that it was spun-off under the assumption (obviously an incorrect one in hindsight) that it would come under tremendous selling pressure from investors and funds who were given its shares in the transaction but did not want to keep them.

5)  Last but not least we have Seaboard Corp (SEB).  This is a little more obscure than the other mega companies that were mentioned.  I am not personally familiar with it, but apparently it has a diverse set of assets including pig farming, grain milling and ocean shipping.  Hmmmmm.

Despite the fact that the stock has soared 187% over the past five years, this volatile stock still only trades at 9 times earnings and 0.9 times its book value.  I suspect that the collapse in shipping rates has something to do with why a stock named Seaboard is so cheap right now.

So that's the list.  Interesting stuff.  On an unrelated note, it's absolutely amazing how these huge up days in the market hammer my CAPS score even though I am only short a handful of companies out of my giant 200 pick portfolio.  Clearly, the conservative nature of my picks...most of them being solid dividend paying companies and even a few exchange traded bonds or bond funds, is causing me to significantly underperform the S&P 500 on days like today.  If I am correct about the markets being fairly flat over the next several years (after a likely pullback some time in 2009) my CAPS portfolio should outperform. 

As someone who still holds a number of dividend-paying common stocks in real life and no short positions, I welcome days like today with open arms...even though I highly doubt that the gains will stick.

Deej

2 Comments – Post Your Own

#1) On April 16, 2009 at 5:29 PM, Tastylunch (29.37) wrote:

Re: Duke

I thought the same thing until I found out they are taking on a lot of debt to build a new nuclear power plant (which is going to cost around 11 billion)

http://en.wikipedia.org/wiki/William_States_Lee_III_Nuclear_Generating_Station

so it might not be as cheap as some of the others.

Seaboard sounds very interesting, thanks for the list Deej!

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#2) On April 17, 2009 at 7:00 AM, dwot (65.40) wrote:

And how is the book value assessed?  Any asset price inflation in there?  I am not so trusting of bookvalue without a lot of research.

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