A company’s book value is derived by summing up all of its assets and subtracting all its liabilities. This is, arguably, what would be left after a total liquidation of the company. Some investors focus on book value when investing because it is an accounting look at what one is buying without the bias of investor sentiment. To this end, it is as close as one can get to a pure picture of what a company is worth, keeping in mind, of course, that accounting isn’t exactly a pure science.
Generally speaking, a stock trading near or below book value is of the most interest, since such a company can be bought for close to or, better yet, less than what it is “worth” — at least by one measure. Clearly, investors looking at this largely value-oriented metric prefer buying a dollar of assets for less than a dollar.
It may seem odd to suggest that this is even possible, since efficient markets theory dictates that arbitrage investors should quickly move in and bid up prices to the point where there is no longer a discount to book value. However, many of the companies that trade close to or below book value trade at such low valuation levels for a reason. Moreover, the total liquidation of a company isn’t a simple undertaking, so that quick money is far from assured. Thus, investors need to carefully research such companies and make sure that any risks are fully understood before investing.
To help value-oriented investors find companies that are trading near or below book value, a weekly screen listing such companies is included in the Summary & Index section of The Value Line Investment Survey. The screen shows the 100 companies with the widest discount to book value and includes Value Line’s proprietary Timeliness and Safety ranks, as well as recent price, book value per share, the percentage discount to book value, Beta, P/E, and dividend yield. Basically, that is everything one needs to start the research process.
Below are some of the more interesting investment candidates from the list. Subscribers can access the entire list by clicking here.
Bunge Limited (BG) is a global agribusiness, fertilizer, and food products company acting in the “farm-to-consumer” chain. The Agribusiness (66% of 2010 sales) mainly consists of the purchase, storage, transport, processing, and sale of soybeans, sunflower seeds, wheat, and corn for animal feed manufacturers, wheat and corn millers, as well as in-house and third-party oilseed processors. As a result, the unit benefits from global demand for meat products (primarily poultry and pork). The edible oil and milling products segments (18%) offer a diverse range of items for the food processing industry, such as shortenings, mayonnaise, flour, and rice. The Sugar and Bioenergy division’s (10%) Brazilian operation produces 15-20 million tons of sugar annually for export, domestic use, and trading. Finally, Bunge is a leading blender and distributor of crop fertilizers to farmers in South America (6%). Bunge’s primary markets are Europe (34% of 2010 sales), The United States (23%), and Brazil (20%).
Although Bunge shares are trading at a 38% discount to book value —which we attribute to exposure to the uncertain global economic outlook— the company is expected to have a strong earnings performance in the second half of 2011. Grain merchandising ought to be strong as a large harvest in South America boosts the processing business. Demand for edible oil products is healthy in North America and Europe, but small oilseed crops may crimp margins in the U.S. a bit. The company’s sugar outlook calls for better pricing to offset reduced volume due to drought and frost. Also, the competitive landscape in food is easing somewhat.
Looking long term, we expect Bunge to post healthy earnings advances as the world population continues to grow at a fast pace. Some volatility should be expected by investors since Bunge’s operations are dependent on weather conditions, which are often times unpredictable.
Capital One Financial Corporation
Capital One Financial Corporation (COF) is one of the largest providers of Visa and MasterCard credit cards in the United States. The credit cards are offered to consumers through Capital One Bank. Other components of its loan business include automobile, home, and commercial lending. In addition, COF offers savings accounts and foreign time deposits, along with other savings facilities. At the end of 2010, the company had over $197 billion in assets.
Although Capital One’s 30-day delinquency rate has risen modestly over the past three months, that important metric was on the decline for the 16 months prior to June 2011. Net charge offs (debt that is unlikely to be collected) in August grew for the first time on a sequential basis since November 2010. Too, a weak economy may well diminish credit card volume growth, which also explains its 35% discount to book value.
However, we believe consumer credit conditions may not turn out as bad as the current valuation suggests, and view the stock’s recent underperformance as a potential buying opportunity. We expect the acquisition of the U.S. arm of HSBC and ING Direct's U.S. online banking service to improve domestic operations significantly in the coming years.
Winn-Dixie Stores (WINN) operates as a food retailing company under the Win-Dixie banner. The company offers a wide range of grocery items such as meat, seafood, deli, and floral. In addition to national brands, Winn-Dixie also has some private-label selections in its portfolio. Furthermore, at its fiscal year end (June 30th, 2011) the company operated 401 pharmacies, 80 liquor stores, and five fueling stations in 514 locations throughout states that include Alabama, Florida, and Georgia.
There have been many challenges for Winn-Dixie Stores, of late. First, the company is still rebounding from last year’s oil spill that hurt traffic at numerous locations. Its financially distressed customer base is arguably more conservative with regards to spending these days, due to low employment levels, housing prices, and general economic instability. Lastly, the company is trying to improve the image of its stores, which have in the past been perceived as less attractive and “customer-centric” than competing grocers, and is contributing to its 55% discount to book value.
Still, signs of a rebound are evident since the stock price is relatively unaltered since our July report. We attribute this to cost containment efforts and progress in its store upgrades, and operating efficiency initiatives. In addition, WINN is seeking to revitalize volume by adding more prepared and frozen meals. This tactic is aimed at catering to people’s hectic lifestyles. But, all told, investors may want to wait on the sidelines until economic conditions are sustainably improved.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.