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Nathan Parsh
Nathan Parsh
Articles (194) 

3 Industrial Stocks Trading Below the GF Value Line

These stocks could offer double-digit returns, in my opinion

December 27, 2020 | About:

The S&P 500 continues to trade with an elevated earnings multiple, making finding securities that are trading at a discount to their intrinsic value a difficult endeavor.

However, there are still some deeply discounted stocks in the market place, if you know where to look. Fortunately, GuruFocus has some tools to help investors do just that.

One of the newer features at GuruFocus is the GF Fair Value Line, which seeks to estimate the intrinsic value of a stock based on the following factors:

  • Historical multiples, including price-earnings and price-to-free-cash-flow.
  • A GuruFocus adjustment factor based on the company's past returns and growth.
  • Future estimates of the business performance.

In this article, we will look at three dividend-paying Industrial stocks trading below their GF Value, all of which have at least double-digit total return potential by my estimations.

Apogee Enterprises, Inc.

Apogee Enterprises, Inc (NASDAQ:APOG) is a construction company that operates four business units: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical Technologies. The company has a market capitalization of $861.5 million and generated revenue of $1.4 billion in fiscal 2020 (the company's fiscal year concludes at the end of February).

Apogee Enterprises has raised its dividend for the past nine years. The dividend's compound annual growth rate is 8.6% since 2010. The company increased its dividend by 7.1% for the Feb. 18 payment. With an annualized dividend of $0.75 and a current share price of $32.65, Apogee Enterprises yields 2.3% today. For context, the stock has an average yield of 1.3% over the last five years. The current yield is also superior to the average yield of 1.6% for the S&P 500 index.

According to analysts surveyed by Yahoo Finance, Apogee Enterprises is expected to earn $2.34 per share in fiscal 2021. Based on the most recent closing price, the stock has a forward price-earnings ratio of 14. For comparison purposes, the stock has an average price-earnings ratio of 20.9 since 2010. Apogee Enterprises traded rather erratically in the beginning part of the last decade. The average price-earnings ratio declines to 16.6 when looking at just the last five years. This seems to be a more reasonable valuation target looking at the history of Apogee Enterprises.

That said, the stock still looks cheap on an historical basis. Apogee Enterprises also trades at a discount to its GF Value:

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Apogee Enterprises has a GF Value of $36.84. Using the current share price, the stock's price-to-GF Value ratio is 0.89. Apogee Enterprises is rated as modestly undervalued due to this ratio. The share price would have to increase 12.8% for Apogee Enterprises to trade with its GF Value. At this level, the dividend would be 2.0%, meaning total returns for the stock could be almost 15%.

Apogee Enterprises offers the potential for double digit total returns in addition to a market-beating dividend yield. Shares of the company trade below both their historical average and their GF Value. Investors looking for a smaller company in the industrial space could see a solid rate of return from Apogee Enterprises, in my view.

Energizer Holdings, Inc.

Energizer Holdings, Inc. (NYSE:ENR) came to be following a series of mergers and acquisitions, the last of which occurred on July 1, 2015. At that time, the company spun off its household products business. The resulting company and the latest incarnation of Energizer Holdings is one of the largest manufactures, marketers and distributors of household and specialty batteries in the world. Energizer Holdings also manufactures lighting products and automotive fragrance products. The company is valued at $3 billion and produced revenue of $2.7 billion in its most recent fiscal year (which ended Sept. 30).

Energizer Holdings has paid a dividend every year since entering into its current form. The dividend was paused for the most recent fiscal year, but has a CAGR of almost 30% since 2015. However, the vast majority of this growth occurred in fiscal 2016. The company has paid the same dividend for nine consecutive quarters. With a current annual dividend of $1.20 and a share price of $43.62, Energizer Holdings yields 3.0%. This compares favorably to the stock's six-year average yield of 2.1%.

Analysts expect Energizer Holdings to earn $3.02 per share in fiscal 2021, giving the stock a forward price-earnings ratio of 14.4. This is a solid discount to the stock's five-year average price-earnings ratio of 17.2. Energizer Holdings is also trading at a significant discount to its GF Value:

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With a GF Value of $58.87, Energizer Holdings has a price-to-GF Value ratio of 0.74 as of the most recent close. Reaching its GF Value would reward shareholders of the company with a 35% return. The stock's dividend yield at the GF Value would be 2%, so Energizer Holdings could offer a total return of 37%.

Energizer Holdings is a little-known company that operates in a bit of a niche business. The stock does appear cheap compared to its own history, but it does seem extremely cheap against its GF Value. Shareholders interested in the company's business could see strong returns.

L3Harris Technologies

On June 29, 2019, L3 Technologies and Harris Corporation completed their merger. As a result, L3Harris Technologies (NYSE:LHX) was created. The defense contractor is comprised of four reportable business units: Missions Systems, Communication Systems, Space and Airborne Systems and Aviation Systems. The company has a market capitalization of $38.9 billion and produced revenue in excess of $18 billion over the last four quarters.

Shareholders of the legacy company have experienced a long track record of dividend growth, as the dividend has increased for 19 consecutive years. The company raised its dividend 13.3% for the March 27 payment. L3Harris' dividend has compounded at an annual rate of 12.5% over the last decade, proving that the company has been quite aggressive at raising its distributions. Using the annualized dividend of $3.40 and Thursday's closing price of $185.16, L3Harris pays a 1.8% dividend yield at the moment.

Analysts expect L3Harris is expected to earn $11.56 in 2020, giving shares a forward price-earnings ratio of 16. This is very much in-line with the company's larger peers in the aerospace and defense industry. On the other hand, L3Harris trades significantly below its GF Value Line:

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GuruFocus assigns a GF Value of $264.32 to the stock. This gives the stock a price-to-GF Value ratio of 0.7 , which earns L3Harris a rating of modestly undervalued. Shareholders could see a return of almost 43% were the stock to trade with its GF Value. At the GF Value, the dividend yield would be 1.3%, so total returns could be 44% for L3Harris.

L3Harris' recent merger helped to create one of the largest defense contractors in the market. The combined company also has a long track record of dividend growth, and shareholders have enjoyed double-digit dividend increases for much of the last decade. While many investors might be more familiar with the company's larger brethren, L3Harris appears to offer significant upside potential, which makes the stock a strong buy in my opinion.

Final thoughts

Valuations for the market as a whole continue to creep higher, but there remain undervalued stocks offering excellent return potential. Apogee Enterprises, Energizer Holdings and L3Harris Technologies each trade at a level that is below its intrinsic value by certain estimations. Each name is likely not that well-known amongst investors, but each stock comes with double-digit return possibilities by my estimation. In the cases of Energizer Holdings and L3Harris Technologies, significant returns are even possible.

I think investors looking for some value (and income) from the industrial sector could do well owning any of these names.

Author disclosure: the author has no position in any stocks mentioned in this article.

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About the author:

Nathan Parsh
I am originally from the Detroit, Michigan area, before moving to Maryland to begin a career as an educator. This is my 15th year teaching. My wife and I have two young children who keep us on our toes.

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