Everyone loves a good bargain. This is particularly true of value investors, those who thriftily peruse the stock market for companies trading for less than they are worth in the long term. We're eight years into a bull market, but there are still some decent values out there for the thrifty-minded seeking to buy dollar bills for 50 cents. Which is why we asked three of our Foolish contributors to put their heads together and come up with a few great candidates. In response, they offerred up Kinder Morgan (KMI 1.73%), Mastercard (MA 0.98%), and American Express (AXP 0.28%) . So, without further ado, here are the details on 3 value stocks for thrifty investors.
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A vital energy infrastructure player at a low price
Sean O'Reilly (Kinder Morgan): Kinder Morgan operates everything from natural gas Pipelines, energy transfer terminals, refined products products pipelines as one of North America’s largest energy infrastructure operators. Its importance to the energy industry itself, in addition to a unique set of circumstances we’ll get to in a minute, make it a fantastic pick for any thrifty value investor. Kinder Morgan, along with the rest of the industry, has been caught up in a secular downturn – a product of the precipitous drop of oil prices two years ago. While not a direct problem for Kinder Morgan, which makes most of its money as a toll-collecting middle man not an oil & gas producer, it did lead to a lack of confidence in the sector on the part of Wall Street. This was bad news for KMI as it uses billions of debt, financed from the financial district of Manhattan, to fund its expansion and even roll over existing debt. This modest ‘house of cards’ came to a head and Kinder was forced to cut its precious dividend in the winter of 2015.
Fortunately for value-minded individuals who don’t mind waiting a few years for a proper turnaround, the situation already seems to be on the mend. Interest coverage ratios continue to rise as Kinder’s management rights the ship, sells off assets, and pays down high interest debt. It should also be noted that the years ahead will likely bear fruit as the true reason for the dividend cut over a year and a half ago was more specifically born out of the decision to NOT hold back on growth-plans just to save its dividend – short term pain for long term gain. With a price-to-book ratio of just 1.34 according to S&P Global Market Intelligence (far below the 3.6x Price/Book assigned to peer Enbridge Inc.), Kinder Morgan is a fantastic pick for any thrifty investor.
When a cheap stock is also an excellent value
Jason Hall (American Express): There's a saying -- "Price is what you pay; value is what you get." -- which should remind us that just because something's cheap doesn't mean it's worth buying. But in the case of upscale charge card and business lender American Express, I think the market continues to give investors the opportunity to buy a very high-quality company for a bargain-bin price.
Yes, American Express has lost -- or walked away from, depending on who you ask -- lucrative partnerships with Costco and others recently. This has certainly hurt AmEx's earnings in recent quarters, and is expected to weigh on them for the next few quarters to come:
AXP EPS Diluted (TTM) data by YCharts
But it's not like the company is in a death spiral; to the contrary, American Express is still an absolute cash-cow business. Over the past 12 months, AmEx has generated $5.22 billion in net income and $5.5 billion in free cash flow, even after big increases in spending on marketing and promotions in 2016.
And there's a huge opportunity for American Express: The global middle class is set to add billions more members in coming decades, a fresh batch of new customers as the global payments pie gets much bigger and wealthier.
At 14 times trailing and 13.8 times next year's earnings, American Express is a top-tier company trading at a sale price. This is particularly true if the company is able to continue the recent trend of new customer growth it reported in late April, and drive profits higher.
Processing profits millions of time per day
Steve Symington (Visa): With shares of Visa up a modest 3% since its strong first-quarter 2017 report last month, I think the payments technology juggernaut is an enticing buy.
Visa's revenue climbed an impressive 23% year over year last quarter, to $4.5 billion, thanks to its astute acquisition of Visa Europe last summer, and strong growth in payments volume (up 37% on a constant-dollar basis), cross-border volume (up 11% if include Europe in last year's Q1 results) and processed transactions (up 12% including Europe). On the bottom line, adjusted earnings grew 27%, to $2.1 billion, or $0.86 per share. And looking forward to the full year of 2017, Visa told investors to expect top-line growth to arrive at the high end of its previous guidance for 16% to 18%, which should translate to mid-teens percent growth in adjusted earnings per share.
Of course, that raises the question of whether that growth is sustainable past the near term given Visa's enormous size (its market capitalization sits around $212 billion as of this writing). But as I noted in my similar pitch for Mastercard (MA 0.98%) earlier this year, 85% of the world's retail payments are still in cash and check.
"Looking ahead,"" added Visa CEO Alfred Kelly Jr. after last month's report, "we are continuing our efforts across the globe to electronify commerce and digitize economies to the benefit of consumers and societies alike."
Visa is also putting its money where its mouth is, repurchasing and retiring 19.1 million shares of class A common stock for $1.7 billion last quarter alone. If that wasn't enough, Visa's board authorized a new $5 billion share repurchase program to bring its remaining funds available for buybacks to $7.2 billion.
With shares of Visa now trading at 23.4 times this year's expected earnings -- a reasonable premium considering its growth -- I think now is a great time for long-term investors to open or add to their positions.
