This week, reports have been made indicating that consumer confidence has reached a 3-month high in the US and a 6-month high in Europe. Confidence was also up in Japan during January from December, making this a potential global trend. In the US, the preliminary Thomas Reuters/University of Michigan index of consumer sentiment has risen to 76.3 in February compared to January’s 73.8. This increase is higher than Bloomberg’s median predictions by 1.5.
In the Euro Zone, a gain in the consumer confidence index is a positive sign, making an easing of the debt crisis more plausible looking towards the future. Consumer spending accounts for around half of the Euro Zone’s economy so an increase in confidence could directly imply an increase in spending to come. The index is now at -23.6, increasing from the previously reported -23.9.
Keeping this optimism in mind, we ran a screen on consumer goods stocks with a market cap above $300M (small cap or larger). Consumer goods are the first to be impacted by increased spending. We then cross-referenced this list to see which of these companies are potentially undervalued by LFCF/EV ratio (Levered Free Cash Flow/Enterprise Value).
The LFCF is the cash a firm has left over after it pays off its debts, plus interest. This is important for dividend yields and for sustaining the day-to-day operations of the company. The EV is simply another way to measure a company’s value, similar to a Market Cap. Ratios above 10% appear undervalued.
The higher the ratio of these two values, the more a company is thought to be undervalued.
Keeping in mind an increase in consumer confidence both at home and abroad, do you think these companies have the potential to sell more of their products and become more profitable? The potential of being undervalued along with the possibility for Europeans and Americans to spend more on consumer goods means that now could be the time to buy a piece of these companies.
Interesting enough, four of the six mentioned companies below are associated with the auto industry. List Average 1-Year Return: 7%.
Use the Compar-O-Matic to see how quarterly sales have varied for each of these firms over the last two years:
1. Cooper Tire & Rubber Co. ( CTB): Together with its subsidiaries, manufactures and markets replacement tires in North America and internationally. Market cap at $1.65B, most recent closing price at $26.18. Levered free cash flow at $214.53M vs. enterprise value at $1.76B (implies a LFCF/EV ratio at 12.19%).
3. Hanesbrands Inc. ( HBI): Engages in the design, manufacture, sourcing, and sale of apparel essentials in the United States and internationally. Market cap at $3.9B, most recent closing price at $39.69. Levered free cash flow at $556.21M vs. enterprise value at $5.40B (implies a LFCF/EV ratio at 10.3%).
4. Navistar International Corporation ( NAV): Through its subsidiaries, manufactures and sells commercial and military trucks, buses, diesel engines, recreational vehicles (RVs), and chassis, as well as provides service parts for trucks and trailers. Market cap at $2.18B, most recent closing price at $27.24. Levered free cash flow at $613.50M vs. enterprise value at $5.43B (implies a LFCF/EV ratio at 11.3%).
5. National Presto Industries Inc. ( NPK): Engages in the production and sale of housewares/small appliances, defense products, and absorbent products in North America. Market cap at $513.51M, most recent closing price at $74.53. Levered free cash flow at $41.42M vs. enterprise value at $389.46M (implies a LFCF/EV ratio at 10.64%).
6. PACCAR Inc. ( PCAR): Designs, manufactures, and distributes light-, medium-, and heavy-duty trucks and related aftermarket parts primarily in the United States and Europe. Market cap at $17.11B, most recent closing price at $48.46. Levered free cash flow at $3.85B vs. enterprise value at $23.73B (implies a LFCF/EV ratio at 16.22%).
( Written by Kapitall's Ryan Horch)