One feature that I find especially useful on GuruFocus is the GuruFocus 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 companies in the consumer discretionary sector trading near or below their GF Values. Each stock on this list also pays at least a 1% dividend yield.
Polaris Inc.
Polaris Inc. (PII, Financial) designs, engineers and manufactures all-terrain vehicles (ATVs), boats, motorcycles and snowmobiles. The company also provides replacement parts and related accessories through dealers in the U.S., Canada and Europe. Off-road vehicles and snowmobiles compromised 62% of sales last year with aftermarket services adding 13%. Polaris has a market capitalization of $5.9 billion and generated $6.8 billion of sales in 2019.
Polaris has increased earnings per share at a compound annual growth rate of 11.4% over the last 10 years. Net profit has increased at an annual rate of 10.3% over this same period of time. Share repurchases and a slightly lower profit margin explain the differences in the two growth rates. Analysts surveyed by Yahoo Finance expect Polaris to earn $7.28 per share in 2020, which would be a 15.2% improvement from last year's result.
Polaris has increased its dividend for 25 consecutive years, including a 1.6% increase for the March 16 distribution. This is below the average increase of 11.8% that shareholders received from 2010 through 2019. It should be noted that the last two increases were both for 1 cent.
With an annualized dividend of $2.48, shares yield 2.6% using the Dec. 31 closing price of $95.28. For context, Polaris' average yield over the last decade is 2.1% so investors are receiving a higher than usual yield at the moment.
Using the annualized dividend and expected EPS for the 2020, Polaris has a payout ratio of 34%. This is slightly below the 10-year average payout ratio of 38%.
Polaris has a forward price-earnings ratio of 13.1, which is a discount to the 10-year average price-earnings ratio of 18.3 The stock is trading below its GF Value:
Polaris has a GF Value of $104.33. Based on the most recent closing price, the stock has a price-to-GF Value ratio of 0.91, earning the stock a rating of fairly valued. If the share price were to reach its GF Value, shareholders would see a 9.5% gain. Add in the dividend yield, which would be 2.4% at the GF Value, and total returns could reach almost 12% for Polaris.
Polaris has increased its bottom-line at a high rate over the last 10 years. The company also has a long history of growing its dividend, even if the more recent increases have underwhelmed. Polaris offers a potential low double-digit total return at its current price. This would be a solid return for a stock trading below both its long-term historical average valuation and GF Value. As such, the stock appears to be a buy in my opinion.
Sonoco Products Company
Sonoco Products Company (SON, Financial) is a leading manufacturer of paper-based tubes and cones, flexible packaging, industrial products and point-of-purchase displays. The company's products are used in the appliances, electronics, construction, food and beverage industries. Sonoco Products is worth just under $6 billion and had $5.4 billion of sales last year.
Sonoco Products' EPS has compounded at a rate of 4.2% over the last decade. Net profit has improved at a similar rate as a higher net profit margin has compensated for lower revenue growth. Analysts expect that EPS will decline 4.8% to $3.36 for the full fiscal year.
At 37 years, Sonoco Products has the longest history of dividend growth of the names discussed in this article. The company traditionally increases its dividend for the June payment. However, Sonoco Products has kept its dividend constant for seven consecutive quarters. An increase anytime in 2021 would maintain Sonoco Products' dividend growth streak.
The company's annualized dividend of $1.72 gives shares a yield of 2.9% using Thursday's closing price of $59.25. This is lower than the 10-year average yield of 3.2%. Were the stock to average the current yield for an entire year it would be tied for the second lowest annual average since at least 2004.
Based off of the annualized dividend and expected EPS for the year, Sonoco Products has a payout ratio of 51%. This is almost in-line with the 10-year average payout ratio of 52%. Sonoco Products has an incredibly consistent payout ratio over the last decade, with a tight range of 47% to 55% over this period of time.
Shares of Sonoco Products have a forward price-earnings ratio of 17.6. Since 2010, the stock has an average price-earnings ratio of 16.1, meaning that the stock is trading above its average historical valuation. GuruFocus also finds the stock expensive compared to its GF Value:
With a GF Value of $54.48, Sonoco Products has a price-to-GF Value ratio of 1.09. Shares would have to decline 8.1% to trade with their GF Value.
Sonoco Products has an especially long dividend growth streak, a feat made more impressive given it operates in a cyclical industry. That isn't enough to warrant purchasing of the stock at the moment, in my view, as shares trade above their long-term average valuation and a high single-digit premium to their GF Value. I would wait for a pullback before purchasing shares of Sonoco Products.
Toll Brothers, Inc
Toll Brothers, Inc (TOL, Financial) builds upscale single-family detached homes, townhouses and condominiums on land that it owns and develops. The company has operations in more than 20 U.S. states and 50 "attractive markets." The average base price for single-family and attached homes sold last year was more than $873,000. The average homebuyer added nearly $178,000 in customized options and lot premiums to the base price. Toll Brothers trades with a market capitalization of $5.4 billion and produced revenue of $7.1 billion in fiscal 2020 (the company's fiscal year ends Oct. 31)
Not surprisingly, Toll Brothers struggled mightily during the housing crisis that took place in the 2008 recession. The company posted negative EPS results in 2008 through 2010. The company has recovered very well since, as EPS results have increased with a CAGR of more than 30% over the last 10 fiscal years. Much of this growth was concentrated in fiscal 2014, 2017 and 2018. Toll Brothers' net profits have exploded at a rate of 27.4% per year over the last decade due to higher revenues and better profit margins.
Analysts believe that Toll Brothers will earn $4.83 in fiscal 2021. If achieved, this would be a 42% improvement from the previous year.
Toll Brothers has only paid a dividend for the past four years. Following increases of 70.8% and 7.3% in fiscal 2018 and 2019, the company has maintained the same dividend for 12 consecutive quarters.
The stock's annualized dividend of 44 cents results in a 1% yield using the most recent closing price of $43.47. This matches the average yield since Toll Brothers initiated its dividend.
Based off the annualized dividend and EPS projections for the current fiscal year, Toll Brothers has an expected payout ratio of just 9.1%. This is below the four-year average payout ratio of 12.9%.
Shares of Toll Brothers have a forward price-earnings ratio of 9, which compares favorably to the 10-year average price-earnings ratio of 15.9. Focusing on just the last five years, which have seen a significantly lower valuation, the price-earnings ratio declines to 10.8. Toll Brothers trades just below its GF Value:
Shares of the homebuilder have a GF Value of $45.04, which results in a price-to-GF Value ratio of 0.97 and earns the stock a rating of fairly valued. Toll Brothers sits 3.6% away from its GF Value. The dividend yield would add approximately 1% to returns at the GF Value, but Toll Brothers would offer less than 5% in total returns.
Toll Brothers is definitely a much more volatile stock than the others discussed in this article. Due to the average price points of its homes, Toll Brothers depends heavily on a healthy economy to support its business. When the economy is struggling, as it was during the 2007 to 2009 time period, then the company's business is quite weak. Even though the dividend payout ratio is very low, dividend growth likely will be muted as the company appears content to keep its dividend at the same rate. Given all of this, I would prefer a major pullback before adding Toll Brothers to my portfolio. The stock's unpredictability over long periods of time would require a better discount to its intrinsic value before purchasing.
Final thoughts
Polaris, Sonoco Products and Toll Brothers are three companies in the consumer cyclical industry trading near or below their respective GF Values. Of the three, I think Polaris looks like the best opportunity for solid returns, while I would wait for a pullback in Sonoco Products and Toll Brothers as these names don't offer much in the way of upside potential at the moment.
Author disclosure: the author has no position in any stocks mentioned in this article.
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