Like "awfully good" and "jumbo shrimps," the phrase "cheap compounders" maybe seem like an oxymoron, but they do exist. What is cheap in investing? There's unfortunately no set definition, but I think a company with a single-digit price-earnings ratio can be considered cheap. A price-earnings ratio of below 10 implies no or minimal growth going forward, but just because a stock is cheap doesn't mean it will not grow.
What are compounders? My definition of compounders is companies that can deliver sustainable long-term growth. Apart from earnings per share growth, I also want to see growth in owner earnings. Owner earnings is a cash flow concept introduced by Warren Buffett (Trades, Portfolio) in his 1986 Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) company letter to shareholders. At that time, companies were not required to produce a cash flow statement, nor was stock-based compensation such a big concern. Buffet's formulations of owners earnings removes non-cash distortions from earnings to focuses the investor's attention on how much cash they are getting as partial owners of the company at the end of the period. Buffet explained owner earnings as follows:
"Owner Earnings = (a) Net Income plus (b) depreciation, depletion, amortization, and other non-cash charges minus (c) average annual maintenance capital expenditures."
Owner earnings is similar to free cash flow, but I think it is a superior metric because it starts from net earnings, so it takes stock-based compensation as well as maintenance capex into account.
As the great Yankee philosopher Yogi Berra once said, “It's tough to make predictions, especially about the future." We can only extrapolate the recent past to make estimates on the future.
So my goal with this exercise was to use the GuruFocus All-in-One Screener, a Premium feature, look at some companies with single-digit price-earnings ratios and high single digit (or more) growth of owner earnings over at least the last 10 years.
We are not looking for glamor stocks like the Apple's (AAPL, Financial) and Tesla's (TSLA, Financial) of the investing world. We are looking for the "working class heroes" which are cheap and overlooked. but which keep on quietly delivering year after year.
La-Z-Boy Furniture
One of the stocks that met my screening criteria is La-Z-Boy Furniture (LZB, Financial). La-Z-Boy is a furniture maker known for its iconic recliners. It is currently selling at a price-earnings ratio of under 8 and has grown earning per share at 9% (and owner earnings at 7.4%) per year over the last decade. While the company may face a bit of a slowdown in the next year or two given its extraordinary performance during the Covid pandemic when demand got pulled forward, the company has strong demographic tailwinds going for it as the millennial generation settles down to raise families and buy furniture.
The GF Value chart is also showing it as significantly undervalued. The GF Value is a unique valuation method from GuruFocus which uses the stock's historical price multiples, an adjustment factor based on the company’s past returns and growth and future estimates of the business performance.
Capital One Financial
Another stock that meets the criteria is Capital One Financial (COF, Financial). Capital One is a bank holding company with a very large consumer credit card business. The stock is at a low price-earnings ratio of just over 6. Earnings per share has compounded at about 7% per year and owner earnings at over 10% a year for the decade. Capital One is the 10th largest bank in the U.S. and among the top five credit card companies by purchase volume. The company is a secular growth story as credit card transaction volume and the digitalization of money continues to increase.
The company is moderately undervalued on the GF Value chart.
Gildan Activewear Inc.
Gildan Activewear Inc. (GIL, Financial). Gildan is a maker of basic apparel like active wear such as T-shirts and workout clothes and underwear and hosiery items like socks. The Montreal, Canada-based company is vertically integrated and its manufacturing is located in South America.
The company is very well managed and has high return on invested capital of 25.86%. The company has been profitable for 9 out of the last 10 years (missing GAAP profitability during 2021 due to the pandemic). The 10-year owner earnings growth has been 21% on average. This is the kind of growth you see with high flying tech companies, not with a clothing manufacturer selling at a price-earnings ratio of 9.
The GF Value chart shows it to moderately undervalued.
William-Sonoma Inc.
The fourth stock that met my screening criteria was William Sonoma Inc. (WSM, Financial). Williams-Sonoma is a top company in the huge U.S. home goods market, with operations in B2B, marketplace and franchise segments. It sells premium cookware through Williams-Sonoma (175 stores), casual home decor through Pottery Barn (189 stores) and other products through sub-brands like Pottery Barn Kids (52), PBteen, West Elm (122) and Rejuvenation (nine).
Williams-Sonoma also has a team that works on various projects from residential to large commercial ones. William Sonoma also benefitted greatly from the stay-at-home phenomena during the pandemic, so we can expect a slowdown as conditions normalize, but the company is benefiting from demographic tailwinds of the maturing of the millenials and retirement of the boomer generation. People are moving to new residences and are looking to re-furnish and re-decorate their adobes.
William-Sonoma is currently tagged as modestly undervalued by the GF Value chart.
Celanese Corp
The last stock I want to highlight is Celanese Corp. (CE, Financial). Celanese makes acetic acid and related chemicals that are used for various purposes, such as coatings and adhesives. It also makes specialty polymers for cars, electronics, medical and consumer products and cellulose derivatives for cigarette filters. I think Celanese is a good choice to benefit from high commodity chemical prices because it makes commodity chemicals cheaply from plentiful U.S. natural gas. It also now has a strong position in the global auto market, especially after buying most of DuPont’s (DD, Financial) mobility and materials businesses. Autos are its biggest market now.
Celeanese looks signficantly undervalued in the GF Value chart. The company is selling at a price-earnings ratio of only 8, and has compounded earnings per share at a ~20% CAGR over the decade.
Summary
The following table summarizes these five "working class compounders."
| Ticker | Company | Current Price | Market Cap ($M) | GF Valuation | 10-Year EPS without NRI Growth Rate | 10-Year Owner Earnings per Share Growth Rate | Price-to-Operating-Cash-Flow | PE Ratio (TTM) | Years of Profitability over Past 10-Year |
| CE | Celanese Corp | $118.90 | 12,892 | Significantly Undervalued | 19.80 | 33.60 | 6.99 | 7.86 | 10 |
| COF | Capital One Financial Corp | $111.17 | 42,389 | Modestly Undervalued | 6.90 | 10.20 | 4.35 | 6.24 | 10 |
| GIL | Gildan Activewear Inc | $29.80 | 5,354 | Significantly Undervalued | 21 | 10.96 | 9.30 | 9 | |
| LZB | La-Z-Boy Inc | $28.84 | 1,244 | Significantly Undervalued | 9 | 7.40 | 13.25 | 7.34 | 10 |
| WSM | Williams-Sonoma Inc | $130.59 | 8,693 | Modestly Undervalued | 15.70 | 15.50 | 8.02 | 7.94 | 10 |
