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) -- Second-quarter earnings trounced expectations, propelling the
S&P 500 Index
above 1000 yesterday for the first time this year.
may be in our sights.
As money trickles back into the market, it will boost stocks that were trampled in the March sell-off. Here are three classic value
with cheap shares, consistent
and steady growth prospects. Each comes from an unpopular, old-line business that can't hold the attention of return-obsessed investors.
sells tobacco products, including Marlboro and Parliament cigarettes. The company acquired
, the leading supplier of smokeless tobacco, in January to strengthen its domestic focus. In March 2008, it spun off
Philip Morris International
Investors have been piling into Philip Morris International as demand for tobacco grows overseas, but Altria offers a better deal. The stock has gained 15% this year, outpacing the S&P 500's 13% advance. It's trading at a 2009 price-to-earnings ratio of 11.6 and a 2010 price-to-earnings ratio of 9.6, making it cheaper than Philip Morris International and S&P 500 companies.
Altria has a durable business model and is benefitting from recent acquisitions. Second-quarter earnings rose 9% to $1 billion, or 49 cents per share, as revenue increased 10% to $4.6 billion. Its operating margin expanded from 33% to 39%.
The stock's obvious selling point is its 7.3% dividend yield, compared with 3.4% for the S&P 500. The quarterly payout ratio, the amount of earnings distributed as dividends, is reasonable at 60%.
Altria has nearly $13 billion of long-term debt and quarterly interest expenses of about $287 million. But it's a small burden compared to its brand power and cash flow.
Potash Corp. of Saskatchewan
makes potash, phosphate and nitrogen that's used in fertilizer and animal feeds. Demand for these products will increase as the population grows worldwide and people in developing nations add more meat to their diets.
Potash's second-quarter performance disappointed analysts. Revenue plummeted 67% to $856 million as farmers coping with a recession bought less potash and phosphate. Net income fell 79% to $187 million, or 62 cents. Its operating margin decreased from 46% to 16% and its net margin declined from 35% to 22%.
Still, the company maintained a 22% net margin despite a 67% sales drop, which means managers successfully controlled prices and production levels. While Potash forecasts earnings of $4 to $5 a share for the year, less than half of last year's profit, Chief Executive Bill Doyle predicted sales to rebound in 2010. The stock jumped 8% on July 24, the day after it disclosed its results.
Potash is trading at a 2009 price-to-earnings ratio of 11.7, making it 50% cheaper than its peer group. Fertilizer will probably sell at discounted prices for the rest of year, hurting Potash's margins. However, economic conditions will prevent companies from entering the industry, allowing Potash to fortify its position.
We give Potash a financial strength score of 7.7 out of 10, which is higher than our "buy"-rated average. We rate competitors
Canadian National Railway
, whose shares have gained 38% this year, has remained profitable despite the recession. Its low price and strong financial position make it the most attractive railroad stock.
Second-quarter earnings fell 16% to $387 million, or 82 cents, as revenue dropped 24% to $1.8 billion. However, these declines were less severe than the industry's average. The company also managed to keep its operating margin steady at 33% and its net margin at 22%.
Canadian National has increased its cash by $270 million since June 2008, but a quick ratio of 0.7 suggests the company has further to go. Our model prefers quick ratios to be higher than 1. Still, a debt-to-equity ratio of 0.7 shows conservative leverage.
Although Canadian National trades on par with the S&P 500 when considering book value, it sells at a discount based on earnings. With a 2009 price-to-earnings ratio of 12, the stock is 61% cheaper than its peer group even though it offers better earnings growth. Rivals
Burlington Northern Santa Fe
( BNI) and
are trading at price-to-earnings ratios around 14.
-- Reported by Jake Lynch in Boston