BOSTON ( TheStreet) -- With the stock market posting its best week in a month, it's remarkable to see a **Dow** stock trading at a forward price-to-earnings ratio of less than 10, but eight of 30 are beneath that level. They're not only undervalued on a historical basis, but also based on 2011 earnings expectations. With last week's rally suggesting the recovery is picking up, investors ought to consider these blue-chip stocks. They are ordered from cheap to cheapest.

**Merck**( MRK) sells pharmaceuticals including Nasonex, Pepcid and Crixivan.

**Quarter**: Merck's third-quarter net income tumbled 90% to $342 million and earnings per share fell 93% to 11 cents, hurt by a higher share count. However, excluding one-time items, earnings decreased a modest 6% to 85 cents. Revenue surged 94%. The gross margin rose from 83% to 91%, but the operating margin stagnated at 30%. Merck held $11 billion of cash and $18 billion of debt at quarter's end, equal to a quick ratio of 1 and a debt-to-equity ratio of 0.3.

**Valuation**: Merck's stock sells for a forward earnings multiple of 9.2, a book value multiple of 1.9 and a sales multiple of 2.5, 21%, 60% and 22% discounts to pharmaceutical industry averages. Its cash flow multiple of 12 is on par with its pharma peer average. Merck commands a trailing earnings multiple of 13, compared to a five-year average earnings multiple of 15. The stock has underperformed the Dow in 2010, falling 3.9% as the broader index rose 9%.

**Dividend**: Merck pays a quarterly dividend of 38 cents, equaling a yield of 4.3% with a payout ratio of 54%. It has paid a 38 cent dividend since 2004. Prior to 2004, Merck had a record of distribution increases.

**JPMorgan Chase**( JPM) is a diversified financial company whose commercial bank serves 26,000 clients. It also has an investment banking unit.

**Quarter**: JPMorgan's third-quarter net income increased 23% to $4.4 billion and earnings per share climbed 26% to $1.01. Revenue dropped 11% to $27 billion. The gross margin widened from 61% to 77% and the operating margin extended from 31% to 44%. JPMorgan held $290 billion of cash and equivalents at the end of the quarter and $660 billion of debt, converting to a debt-to-equity ratio of 3.8. It had a tier-one capital ratio of 9.5% at quarter's end.

**Valuation**: JPMorgan's stock trades at a forward earnings multiple of 8.1 and a sales multiple of 1.3, 27% and 24% discounts to financial services industry averages. Its book value multiple, though ostensibly cheap at 0.9, is on par with the peer average. And its cash flow multiple of 29 reflects a 50% premium. JPMorgan is selling for a trailing earnings multiple of 11, a 27% peer discount and a 53% discount to its five-year average multiple of nearly 23.

**Dividend**: JPMorgan pays a paltry quarterly dividend of five cents, translating to a 0.5% annual yield with a 6% payout ratio. It has paid a five cent dividend since 2009. Previously, it paid a distribution of up to 38 cents.

**Travelers**( TRV) is a diversified insurer.

**Quarter**: Third-quarter net income ascended 7.5% to $1 billion. Earnings per share advanced 28% to $2.11. Revenue inched up 2.4% to $6.5 billion. The gross margin expanded from 35% to 36% and the operating margin stretched from 21% to 23%. Travelers carries $5.3 billion of cash and equivalents and $6.3 billion of debt, equal to a debt-to-equity ratio of 0.3. Its subsidiaries receive top financial strength ratings, with grades of AA- from

**Standard & Poor's**.

**Valuation**: Travelers' stock sells for a forward earnings multiple of 9.1, a book value multiple of 0.9, a sales multiple of 1 and a cash flow multiple of 7.3, 35%, 76%, 78% and 51% discounts to insurance industry averages. A trailing earnings multiple of 7.8 represents a 66% discount to the peer average and a 16% discount to Travelers' five-year average multiple of 9.3. The stock's PEG ratio, a measure of value relative to growth, of 0.9 signals a 10% discount.

**Dividend**: Travelers pays a quarterly dividend of 36 cents, converting to an annual yield of 2.6% with a payout ratio of 20%. Travelers boosted its dividend from 33 cents in February. The company's board has a record of regular distribution increases.

**Microsoft**( MSFT) is a software company.

**Quarter**: Microsoft's fiscal first-quarter net income soared 51% to $5.4 billion. Earnings per share surged 55% to 62 cents. Revenue grew 25% to $16 billion. The gross margin rose from 83% to 85% and the operating margin climbed from 35% to 44%. Microsoft held $44 billion of cash and $11 billion of debt at the end of the quarter, equal to a net cash position of nearly $34 billion. A quick ratio of 2.1 and a debt-to-equity ratio of 0.2 signal fiscal prudence.

**Valuation**: Microsoft's stock trades at a forward earnings multiple of 9.7, a sales multiple of 3.4 and a cash flow multiple of 8.5, 59%, 74% and 53% discounts to software industry averages. However, its book value multiple of 4.8 is on par with peers'. A PEG ratio of 0.7 signals a 30% discount to estimated long-run fair value. Microsoft's trailing earnings multiple of 11 represents a 69% discount to its peer average and a 32% discount to the stock's five-year average.

**Dividend**: Microsoft pays a quarterly dividend of 16 cents, equal to a yield of 2.4% with a payout ratio of 24%. It boosted the dividend from 33 cents in the latest quarter. It has a record of distribution increases.

**Hewlett-Packard**( HPQ) sells computer hardware and servers as well as consulting services.

**Quarter**: Fiscal fourth-quarter net income ascended 5.2% to $2.5 billion. Earnings per share increased 11% to $1.10, helped by a smaller float. Revenue grew 8.1% to $33 billion. The gross margin extended from 26% to 27%, but the operating margin hovered at 11%. The balance sheet stored $11 billion of cash and $22 billion of debt at quarter's end, converting to quick ratio of 0.7 and a debt-to-equity ratio of 0.6. HP's 12-month sales have grown 10%.

**Valuation**: HP's stock sells for a forward earnings multiple of 7.4, a book value multiple of 2.4, a sales multiple of 0.8 and a cash flow multiple of 8.2, 52%, 49%, 76% and 38% discounts to computers and peripherals industry averages. Its PEG ratio of 0.3 reflects a 70% discount to estimated fair value. HP's trailing earnings multiple of 12 represents a 46% discount to the industry average and a 23% discount to the five-year average earnings multiple of 15.

**Dividend**: Hewlett-Packard pays a quarterly dividend of eight cents, converting to a one-year yield of 0.8% with a payout ratio of just 9%. The board has kept the quarterly dividend steady at eight cents since 1998.

**Chevron**( CVX) is the world's second-largest energy company. Its rival is

**Exxon**( XOM).

**Quarter**: Third-quarter net income declined 1.7% to $3.8 billion. Earnings per share fell 2.6% to $1.87. Revenue increased 7.6% to $46 billion. The gross margin extended from 21% to 23% and the operating margin expanded from 11% to 12%. Chevron held nearly $15 billion of cash and equivalents and $11 billion of debt at the end of the quarter, equaling a quick ratio of 1.2 and a debt-to-equity ratio of 0.1. Crude oil currently costs nearly $89 a barrel.

**Valuation**: Chevron's stock trades at a forward earnings multiple of 8.5, a book value multiple of 1.6, a sales multiple of 0.9 and a cash flow multiple of 5.5, 58%, 59%, 71% and 34% discounts to oil and gas peer averages. Its PEG ratio of 0.1 reflects a 90% discount to estimated long-term fair value. Chevron's trailing earnings multiple of 9.9 represents a 46% discount to the peer average, but a modest premium to the company's five-year average multiple.

**Dividend**: Chevron pays a quarterly dividend of 72 cents, translating to a yield of 3.4%, higher than the 10-year Treasury yield, and a payout ratio of 34%. Chevron has a record of distribution increases.

**Bank of America**( BAC) is a financial-services company. It's the top mortgage lender in the U.S.

**Quarter**: Bank of America's third-quarter loss widened to $7.3 billion, or 77 cents a share, hurt by a goodwill impairment charge in its credit card business due to a new regulatory rule. The company swung to an adjusted profit of $3.1 billion, or 27 cents, from a year-ago loss. Revenue fell 2%. The gross margin jumped from 43% to 66% and the operating margin climbed from 11% to 31%. Bank of America has $840 billion of debt, equal to a debt-to-equity ratio of 3.6.

**Valuation**: Bank of America's stock sells for a forward earnings multiple of 7.6, a book value multiple of 0.5, a sales multiple of 0.8 and a cash flow multiple of 1, 32%, 42%, 51% and 95% discounts to diversified financial services industry averages. Bank of America is selling at a discount to its five-year average earnings multiple of 15 and its profit spreads consistently exceed peer averages. The company's shares have fallen 22% in 2010 amid mortgage regulatory scrutiny.

**Dividend**: Bank of America pays a quarterly dividend of one cent, converting to a paltry yield of 0.3%. Its dividend was cut from a high of 68 cents during the recession as the bank accepted federal TARP money.

**Pfizer**( PFE) sells pharmaceuticals including Dimetapp, Dristan and Halcion.

**Quarter**: Pfizer's third-quarter net income plummeted 70% to $866 million and earnings per share dropped 74% to 11 cents. Revenue advanced 39% to $16 billion. The gross margin declined from 88% to 87% and the operating margin fell from 38% to 31%. Pfizer has $22 billion of cash and $44 billion of debt, translating to a quick ratio of 1.6 and a debt-to-equity ratio of 0.5. Pfizer's 12-month sales have increased 46%, though net profit has fallen 25%.

**Valuation**: Pfizer's stock trades at a forward earnings multiple of 7.3, a book value multiple of 1.5 and a sales multiple of 2, 38%, 68% and 36% discounts to pharmaceuticals industry averages. But, its cash flow multiple of 13 represents a premium of 18%. A PEG ratio, calculated by dividing the P/E ratio by analysts' long-term growth forecast, of 0.3 demonstrates a 70% discount to estimated fair value. Pfizer is a consensus buy-side value pick, but has fallen 8.5% in 2010.

**Dividend**: Pfizer pays a quarterly dividend of 18 cents, translating to a one-year yield of 4.3% and an elevated payout ratio of 94%. Pfizer halved its dividend to 16 cents in 2009 amid recession, but has since lifted it.

*-- Written by Jake Lynch in Boston.*

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