I screened for profitable companies with price-sales (P/S) ratios below 1 with both positive sales growth in the last five years and quarter over quarter, plus a double-digit return on equity. More than 100 candidates came up, which I narrowed down to stocks with market values above $1 billion.
McKesson Corp. (MCK, Financial)
Annual sales: $202 billion.
Market cap: $30 billion.
P/S: 0.14
Every analyst is trying to forecast when (not if) Amazon (AMZN, Financial) is going to get into the drug distribution business and what that will mean for companies like McKesson. McKesson is the largest pharmaceutical distributor by revenue and is the main supplier to large pharmacies like CVS Health (CVS, Financial) and Walmart (WMT, Financial). The company, however, has experienced partial losses of its Target (TGT, Financial) and Omnicare contracts as CVS has now brought the generic wholesale activities in-house. Since posting an all-time high of $243.60 in 2015, the stock multiple has fallen while the company continues to produce higher sales, profit and book value numbers. With $200 billion in sales for the past 12 months and an outlook for $15 in EPS next year, the 11 times forward multiple makes the stock look like a deep discount.
Notable guru shareholders: Jim Simons (Trades, Portfolio), Charles Brandes (Trades, Portfolio) and Seth Klarman (Trades, Portfolio).
Penske Automotive Group Inc. (PAG, Financial)
Annual sales: $21 billion.
Market cap: $4 billion.
P/S: 0.19
Penske Automotive is an owner and operator of auto dealerships like CarMax (KMX, Financial) and AutoNation (AN, Financial), with a majority of its revenue from sales of import and luxury brands. It also has a professional racing team and NASCAR partnership, a history of financial growth and solid return on equity. More importantly, it is priced at 10 times earnings and gives a 2.7% dividend. EPS may be down slightly (an estimated four cents) due to hurricane season in the Southeastern U.S., but long-term growth will continue. Cars will cost more, people will continue to drive or be driven by autonomous vehicles and the big manufacturers will continue to be the only names in the business.
Notable guru shareholders: Simons, Mario Gabelli (Trades, Portfolio) and Steven Cohen (Trades, Portfolio).
Annual sales: $154 billion.
Market cap: $48 billion.
P/S: 0.31
More than just a 5% dividend trade, Ford’s sales rose 6.2% year over year as F-Series pickups continue to shine, selling north of 76,000 units for a 15.9% increase and the best October sales since 2004. Ford’s SUV retail grew 9%, with the Edge leading the way with its best October since 2007, which grew 36.9%. Lincoln sales, despite the Matthew McConaughey ads, fell 1.8%. Since the 2009 housing collapse, Ford has seen a steady rise in the top line with bottom-line results consistently adding to book value. Long term, the company will continue to be a big player in the industry. Priced at 7.5 times forward earnings, the stock a potential buy.
Notable guru shareholders: Richard Pzena (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Gabelli and Cohen (puts).
CVS Health Corp. (CVS, Financial)
Sales: $182 billion.
Market cap: $72 billion.
P/S: 0.31
CVS' sales have grown like a tech company, going from $76 billion in 2007 to $182 billion this year with more than $5 billion in annual profit. The company has also increased its dividend from 23 cents to $1.93 and used its earnings to buy back close to 25% of outstanding shares. The company is seeking to expand beyond its retail pharmacy and become a health services company. With a platform of 9,600 stores across the U.S., it is in a fantastic position to do that. If it continues to grow earnings and dividends, the approximately $70 price will be a steal regardless of whether or not Amazon does get into the business.
Notable guru shareholders: Pzena, Joel Greenblatt (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).
Cardinal Health Inc. (CAH, Financial)
Annual sales: $130 billion.
Market cap: $18 billion.
P/S: 0.13
Cardinal Health is the third-largest pharmaceutical distributor, behind McKesson and AmerisourceBergen (ABC, Financial), and has built a solid global operation, pushing costs down for its customers. The company’s sales have grown, but its profit has been stagnant for the past decade. As long as it continues to buy back stock and put the profit to retained earnings, however, the value of its stock will continue to rise. The company does provide a 3.3% dividend, which could climb to 10% over the next decade, giving investors a good reason to own it now. Unless Amazon completely disrupts this industry by cutting out the middleman, then it is unlikely Bezos' company will make a dent in the market share the big three have, which is over 90% currently.
Notable guru shareholders: Cohen, John Rogers (Trades, Portfolio) and Charles Brandes (Trades, Portfolio).
Disclosure: I am not long/short any stocks mentioned in this article.
