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Robert Abbott
Robert Abbott
Articles (882)  | Author's Website |

3 New, Undervalued Predictable Stocks

Anthem, Sleep Number and Tyson Foods all have proven records for revenue and Ebitda generation

November 20, 2020 | About:

Three recent additions to the Undervalued Predictable list at GuruFocus are Anthem Inc. (NYSE:ANTM), Sleep Number Corp. (NASDAQ:SNBR) and Tyson Foods Inc. (NYSE:TSN).

They got on the list by getting through a screening process that looks for undervalued stocks based on discounted free cash flow calculations and for consistent growth of their revenue per share and earnings before interest, taxes, depreciation and amortization per share.

In each case, think of inclusion on the list as a starting point, not an endorsement of the stock. That will become clearer as we look at the stocks individually.

Anthem

The health insurer described itself in its 10-K for 2019 as "a leading health benefits company" that serves more than 106 million people, including more than 42 million who belong to its health plans.

Until 2014, it was known WellPoint Inc., when it changed its corporate name to Anthem. It is an independent licensee of the Blue Cross and Blue Shield Association in 14 states and offers specialty plans in other states.

It has a predictability score of 4 out of 5 stars. This chart shows its revenue per share growth since 2010:

Anthem revenue per share chart

It has also grown its Ebitda per share over the past decade:

Anthem Ebitda per share chart

There's no question Anthem should receive a relatively high predictability rating, but we cannot be as sure about its valuation:

  • The GuruFocus Value chart considers it to be fairly valued.
  • Its price-earnings ratio of 15.75 is above its 10-year median of 14.16, but below the Health Plans industry median of 18.14.
  • It carries a PEG ratio (price-earnings ratio divided by Ebitda growth rate) of 2.33, which is well into overvalued territory.

As you will recall, the valuation basis for Undervalued Predictable status is discounted free cash flow, and according to that Anthem was undervalued by 43%.

Here's a 10-year price chart, showing the share price near its 10-year high:

Anthem 10 year price chart

Investors will need to decide for themselves which valuation metric is most telling, and how much they are willing to pay for Anthem's consistently growing profits.

Other information:

  • Financial strength: 5 out of 10.
  • Profitability: 7 out of 10.
  • Dividend: 1.18%.
  • Share buyback ratio (three years): 1.4.
  • Gurus with ownership positions: 24.

Sleep Number

This company designs, manufactures and sells beds that adjust at the touch of a button. In addition, it has invested in even more technologically-advanced bedding solutions, or smart beds.

Its predictability ranking is 4.5 out of 5 stars, a high score that is justified by its revenue per share and Ebitda per share growth rates:

Sleep Number revenue per share chart

Sleep Number Ebitda per share chart

Turning to valuation, the GuruFocus system gives Sleep Number a 54% undervaluation, based on discounted free cash flow.

Other perspectives on valuation include:

  • GuruFocus Value chart: Modestly overvalued.
  • Price-earnings ratio: 19.64, which is slightly above its 10-year median of 19.22.
  • PEG ratio: 1.1, which indicates fair valuation.

Here's the price chart:

Sleep Number 10 year price chart

Although Sleep Number recently hit a new 10-year high, it has pulled back slightly. All things considered, modestly overvalued is probably a reasonable assessment.

Other information:

  • Financial strength: 4 out of 10.
  • Profitability: 9 out of 10.
  • Dividend: None.
  • Share buyback ratio (three years): 13.7, which is relatively high.
  • Gurus with ownership positions: eight.

Tyson Foods

Tyson brands

In its 10-K for 2019, the company provided this description of itself: "Tyson Foods innovates continually to make protein more sustainable, tailor food for everywhere it's available and raise the world's expectations for how much good food can do."

Headquartered in Springdale, Arkansas, it employs 139,000 employees; at its headquarters, it operates a Discovery Center which involves an 80,000-square foot U.S. Department of Agriculture pilot plant space, two consumer sensory and focus group areas, two packaging labs and 25 research kitchens. New to the innovation center in fiscal 2020 is the Tyson Manufacturing Automation Center.

Tyson has a 4 out of 5-star rating for predictability, based on revenue per share and Ebitda per share, as shown in the following two charts:

Tyson Foods revenue per share chart

Tyson Foods Ebitda per share chart

Note that its Ebitda has grown faster than revenue over the past decade, a sign the company is becoming more efficient.

On valuation, the screener shows a discounted free cash flow discount of 63%, which provides a big margin of safety. The GuruFocus Value chart doesn't go quite so far; it calculates that Tyson is modestly undervalued.

The price-earnings ratio is well below the 10-year median of the consumer packaged goods industry, 10. 39 versus 19.21. It is also below its own 10-year median of 13.27. The PEG ratio suggests fair value at 1.05.

The stock plunged in mid-January, well before the Covid-19 pandemic became an issue, and hasn't yet recovered:

Tyson Foods 10 year price chart

Based on this chart, it appears modest undervaluation would be a reasonable conclusion.

Other information:

  • Financial strength: 5 out of 10.
  • Profitability: 7 out of 10.
  • Dividend: 2.75%, and it has grown by an average of 23.10% per year for the past three years.
  • Gurus with ownership positions: 14.

Conclusion

The three new names on the Undervalued Predictable stock screener have all shown strong predictability in generating both revenue per share and Ebitda per share. Anthem, Sleep Number and Tyson Foods are all likely to produce the kinds of long-term results that investors like.

Whether or not they have good entry points is an issue, though. We have seen low discounted free cash flow valuations for all three, however, there are conflicting signals about valuation from Anthem and Sleep Number. All evidence for the undervaluation of Tyson seems consistent.

Value investors may wish to include Tyson, and only Tyson, on their shortlists. Growth investors might consider all three, while income investors might be interested in only Tyson.

Disclosure: I do not own shares in any of the companies named in this article.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


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