TMFDeej (99.47)

There's cheap and then there's CHEAP! / Goodbye Big 3 leasing?

July 27, 2008 – Comments (11) | RELATED TICKERS: GCI , VLO , TEX

While the current bear market has been painful for everyone who is invested in the market, one benefit is that there are some amazingly cheap stocks out there right now.  More than 100 companies in the S&P 500 (which according to my calculations is over 20% :) ) currently have single digit 2009 P/E ratios.  This week's Barron's had an outstanding article on super cheap stocks.  I don't like any of the financial stocks that the article mentioned because it talked about companies in relation to their book values and I definitely do not trust the book values of financials like Lehman Brothers or XL Capital, but here are a couple that I did find interesting:

-  Gannett (GCI) - Gannett owns a number of newspapers and television stations in the United States and the United Kingdom, including the major national publication USA Today.  GCI has been pounded by investors, dropping 54% so far this year after sliding 35% in 2007.  I know that everyone hates newspapers and that it is supposedly a dying industry, but this stock is about as cheap as it gets, trading at only 6 times its estimated 2008 earnings and around half its stated book value.  The company currently pays a 9% dividend that it should be easily able to cover.  I realize that times are different today and that the Internet is eating away at the newspaper business, but when I look at Gannett I can't stop thinking about Warren Buffett's famous investment in the Washington Post years ago.

- ConocoPhillips (COP) - This is a company that I personally own and have blogged about a number of times in the past.  Now normally I don't like cops, but I'll make an exception for this one.  Instead of stealing your money by giving you tickets, this cop is printing it.  ConocoPhillips currently trades at around only 6 times its estimated 2008 earnings.  Investors appear to be afraid of the company's refinery operations, its disappointing exploration efforts, and the recent drop in the price of natural gas (it's North America's largest nat gas producer).  But cheap is cheap and this company is a great value here.

- Marathon Oil (MRO) - As a former shareholder, I am fairly familiar with Marathon (remember I said that I was consolidating my positions into my best bets).  MRO has gotten crushed lately, shedding 21% of its value over the past month.  Its P/E ratio has slid all the way to an eye-popping 5.2.  Sure the company has major exposure to the hated refining sector, but over half of its profits next year will come from its Exploration and Production arm.  Also, many are mentioning MRO as a possible takeover target.

- Valero (VLO) - Speaking of refiners, Valero is possibly the best of breed.  And get this, it currently only trades at 0.9 times book value.  I know that crack spreads are terrible than they probably won't get better any time soon, but this stock is getting unbelievably cheap.  If it continues to fall I may have to take a serious look at it, even though I got rid of all of my exposure to refiners (other than through COP) in 2007.  I'm not ready to buy it yet though because I expect more pain for refiners in the near future.  One thing that I like about Valero is that many of its refineries have the ability to refine sour crude, which is going to become increasingly important over the next several years because a lot of the light sweet oil has been used up.

-  Terex (TEX) - Last but not least we have Terex.  The manufacturer of construction and mining equipment has been firing on all cylinders lately.  It's earnings were up 40% last quarter and its EPS ($2.32) beat analysts' estimates by a whopping $0.32.  That's some amazing growth for a company that is currently trading at an estimated 7 times its 2008 earnings.

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Musings of an Auto Analyst

A couple of weeks ago I blogged about how I expected that automakers' captive finance companieswould eventually have to begin taking massive losses on the vehicles that they have leased over the past several years.  Specifically I said:

"One major problem that I see coming down the road that I don't hear many people talking about is captive finance companies' huge residual value exposure.  I don't have any specific data handy on how much exposure to leasing GMAC and Ford Credit currently have on their books, but I can assure you that they are getting hammered as the vehicles that they leased to consumers several years ago come back and aren't worth anywhere near what they had "estimated" they would be.  I use the word estimated very loosely because most manufacturers have their captive finance companies artificially boost the residual values of the vehicles that they lease in order to provide consumers with attractive monthly payments and move more iron for their parent company" (see post: Liquidity is drying up in the auto industry).

Well, Ford reported its quarterly results last week and they were an absolute mess (see article: Ford's Worst Quarter Ever).  It reported a second quarter loss of $8.7 billion as a result of "a writedown in the value of assets, and losses on falling values of SUVs coming off leases back to the automaker's Ford Motor Credit arm."  Specifically, overestimated residual values accounted for a whopping $2.1 billion of the loss.  Sound familiar?  I never shorted Ford or GM in real life, it is probably a conflict of interest for me to do so not to mention the fact that it would probably be impossible to find shares to short right now anyhow, but I have been will remain short both of them in CAPS.  

These residual value issues will continue to plague automakers.  In fact, it has gotten so bad that Chrysler announced on Friday that  it will no longer offer leases at all through Chrysler Financial (see article: Chrysler Halts Auto Leases).  Between Chrysler pulling the plug on its program, the cost off funds increasing for automakers as their credit worsens, and their becoming more conservative on estimating vehicles' residual values, the days of cheap leases on domestic products may be coming to an end.

Deej

Long COP