American companies in the old economy in the spotlight

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  • Metal Bashing automakers benefit from a good quarter
  • Value can be found if you are ready to select stocks

The US earnings season continued at a steady pace with a week of announcements from “new economy” companies that became investors’ favorites – Amazon, Facebook / Meta, Apple, Microsoft, and al. However, as the season progresses, it is evident that more established companies are showing strong enough results to raise questions about the true value of the US market, with some of the steelworkers mass-producing cars in a way. that Tesla can currently only dream of.

The Detroit Hulks

The main business exercise for senior executives of General Motors (United States: GM) and Ford (US: F) is checking over their shoulders to see if a hostile, all-equity-funded bid is about to come from Tesla. The combined market cap of Detroit-based automakers at $ 151 billion (£ 111 billion) is just 13% of the market’s value of Tesla, meaning Elon Musk could fund a takeover of both with a modest portion of its paper wealth. . The historic weakness of the valuation, in a market that has seen a tremendous bull run, reflects the prevailing view that the technology that powered the 20th century is quickly running out as we move into the world of electric vehicles. mass and hydrogen. fuel tanks.

However, even taking into consideration the worst-case scenario that traditional automakers are unable to change their business models, this is only one way to measure a company like Ford, which is arguably the most skillful of automakers. of Detroit, producing at least 1m cars per shift. To put this in valuation terms, at a forecast price-to-earnings (PE) ratio of nine, Ford is valued at only half of its three-year average PE ratio of 18 – this for a company that made quarterly profit. before taxes. of $ 1.9 billion. Ford, like other automakers, experienced some contraction in its margins during the period due to continued semiconductor shortages limiting manufacturing capacity, especially in its European division, but chip availability has declined. is improved and its historic low rating is attractive from a value investor’s perspective. One for the watch list.

If managerial skills were a prerequisite for the company’s survival, then General Motors should have given up the ghost long before its taxpayer-funded bailout in 2009. The company has spent years taking a bad turn. decision after decision before it finally became one of the biggest business failures of all time. A prime example is the little-known fact that GM released the first usable electric car to the mass market in the 1990s, called the EV1. Unfortunately, with oil hovering at just $ 20 a barrel at the time, gas-guzzling sport utility vehicles were all the rage – which The simpsons’ taunted in an episode like “Canyonero: Unexplained Fires are the Business of the Courts!” GM eventually recalled the hundreds of EV1s it had loaned on lease and, in its infinite wisdom, had them crushed. As if to fix that decision, GM and its Chinese joint venture partner SAIC have now developed a cheaper, mainstream electric car.

Interestingly, GM shares are trading at a slight discount to Ford with an average PE ratio of 8.4, in that this is broadly in line with its long-term average, while Ford appears to have further lowered in the market estimate, which opens up the possibility that Ford would have more value against the grain if the market overreacted by cutting its shares too severely.

Metal crushers and equipment manufacturers aren’t everyone’s idea of ​​a modern investment, but caterpillar (US: CAT) is still a flagship company for the US economy. The heavy-duty equipment maker showed signs during the quarter that its operational gear was starting to overdrive, helping it absorb higher costs. Third-quarter sales rose 27% to $ 11.7 billion, with higher transportation and labor costs manifested in its cost of goods sold, which was $ 1.7 billion more to $ 8.6 billion. While stock ratings remain at a consensus PEG ratio of 20, the PEG ratio is approaching 0.6 – anything below 0.5 would count as a value by this metric – and Caterpillar could be one of. those to watch for a better point of purchase.

Food and sparkling

Whatever life has been like for the rest of us over the past few years, it has certainly never been boring to Kraft Heinz (United States: KHC). Earlier this year, he agreed to pay fines totaling $ 62 million to the Securities and Exchange Commission to settle allegations that he manipulated his accounts between 2015 and 2018 ahead of the controversial merger with Heinz – including the motive was to improve the performance of Kraft. cost ratios.

The added thrill with the company is that 26% of it is owned by Warren Buffett’s Berkshire Hathaway investment firm. Buffett, also known as the Sage of Omaha, has so far maintained his public commitment to owning the shares, on the condition that he believes the company needs to start repaying its debt. There were signs in the quarterly results that he is keeping his promise to deleverage – the book value of his debt in the quarter was $ 24 billion, up from $ 28 billion at the end of last year .

Overall, there were clear signs in the statement of cash flows that management is trying to improve the cash position. For example, cash outflows to cover inventory fell 40% to $ 264 million, compared to the same period last year. In fact, there has been an ever-higher cash flow return in recent results, suggesting that the synergies between Kraft and Heinz that were the base merger scenario may finally pay off.

The NAV / price ratio of 0.9, according to Refinitiv data, puts KH at an attractive discount to many of its stock market peers. The consensus PE ratio of 13.8 is slightly above its three-year average, and as long as Buffett stays put as an investor, stocks hold a value appeal.

Coca Cola (US: KO) is another of Berkshire Hathaway’s preferred investments, although its overall stake is less than 10%. Coca-Cola’s main asset is its instantly recognizable and hard-to-replicate brand, which puts a wide economic divide around its operations – as long as the Americana remains in fashion. Overall, the third trimester was largely routine; operating profits rose $ 600 million to $ 2.9 billion, and the company completed the post-period acquisition of sports drink maker BodyArmour – paying $ 5.6 billion for the 85% of the company that it did not already own.

Unsurprisingly, with a cash conversion rate of over 100% and an average return on capital employed of 16% per year, in terms of business profile, Coke represents a slightly more infrastructure-heavy version of the tech companies that have propelled United States. indices higher in the last 18 months. As such, it can really only qualify as a stock that occasionally offers good relative value, and with a PEG ratio above 1.6 and an average PE ratio of 24, you might be better off waiting for a better price. purchase.

The main impression of the third quarter season was that as long as investors avoid paying too much for highly rated tech stocks and follow the index in a way that makes them proxy shareholders, then there is. pockets of potential value to be found. It is a useful reminder that stock picking remains a strategy to be followed even when the times are good and all the boats are floating on the tide.

We will have more on the US market in an upcoming cover story.


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