5 Companies You Can Buy Today

There are many ways to value a company. Price to earnings. Price to cash flow. Liquidation value. Price per eyeballs on website. Price to a number I completely made up (this one never gets old). Price to CEO's ego divided by lobbying activity as a percentage of revenue (this one doesn't get used enough).

Which one is best? They're all limited and reliant on assumptions. No single metric holds everything you need to know.

The metric I'm using today is no different. But it's perhaps the most encompassing, and least susceptible to hidden complexities of a company's financial statements. The more I think about it, the more I feel it's one of the most useful metrics out there.

What is it? Enterprise value over unlevered free cash flow.                                               

  • Enterprise value is market capitalization (share price times shares outstanding) plus total debt and minority interests, minus cash.
  • Unlevered free cash flow isfree cash flow with interest paid on outstanding debt added back in.

The ratio of these two statistics provides a valuation metric that takes into consideration all providers of capital -- both stockholders and bondholders.

But you invest in common stock, so why should you care about bondholders? Ask Lehman Brothers investors. When a company earns money, it has to take care of bondholders before you, the common shareholder, get a dime. Focusing solely on profits in relation to equity can be dangerously misleading.

Enterprise value provides a more encompassing view. By bringing debt capital into the situation, we see real earnings in relation to the company's entire capital structure. If you owned the entire business, this is the metric you'd naturally gravitate toward.

Using this metric, here are five companies I found that look attractive.

Company

Enterprise Value/ Unlevered FCF

5-Year Average

 

CAPS Rating (out of 5)

Ford (NYSE: F  ) 8.1 24.4 ****
Intel (Nasdaq: INTC  ) 15.2 19.9 *****
Johnson & Johnson (NYSE: JNJ  ) 14.9 17.5 *****
Hewlett-Packard (NYSE: HPQ  ) 8.5 15.8 ***
Eli Lilly (NYSE: LLY  ) 9.5 16.9 ****

Sources: S&P Capital IQ, Motley Fool CAPS.

Let's say a few words about these companies.

Ford
Ford is one of the more remarkable turnaround stories of the last decade, but its stock is still clouded in a stigma of the American auto industry. Look under the hood, however, and you might be surprised. The automobile market may be healthier than you think, and is set up for what could be a strong rebound. As Motley Fool advisor Joe Magyer noted last year, collapsing auto sales during the Great Recession has created pent-up demand. "The good news is that new vehicle sales should snap back thanks to an economic recovery and pent-up demand," he wrote. "The average age of cars on U.S. roads is now a record 10.6 years, according to Polk, as a tough economy has forced drivers to grind out just a few more miles on their clunkers. As those vehicles get more and more expensive to fix and used-car prices hover near record highs, new vehicle demand will get pushed upward whether the economy comes along for the ride or not."

Intel
Five years ago, Intel earned $1.20 a share. Its stock price? About $25. Last year, Intel earned $2.30 a share. Its stock price? About $25.

Intel is among a handful of large-cap tech companies that have seen their business, earnings, and cash flow zoom ahead while their stocks languish. Trading at a multiple to earnings and cash flow that implies no earnings growth -- a highly unlikely prospect -- and throwing off a 3.3% dividend yield, Intel is one of my favorite companies for investors looking for good, high-quality blue chip investments to hold for the long run.

Johnson & Johnson
Few companies can boast a track record of rewarding shareholders as pristine as Johnson & Johnson's -- the company has paid a dividend every year since at least 1962, with 49 consecutive yearly increases -- but you would never know it looking at its stock price and valuation. Still spooked by recalls, investors have priced J&J shares at a value that would have been unthinkable in recent years. With a dividend yield of about twice what you can receive from 10-year Treasury bonds, plus another boost from several billion in annual share buybacks, J&J is a cheap stock that has three big things going in its favor: riding a boom in health-care spending, global diversity, and a time-tested business model that emphasizes decentralization of its business units.

Hewlett-Packard
You probably know the story: HP ran the gauntlet in recent years of misguided management and boneheaded business moves. Its former CEO doubled down on expensive acquisitions, squandered precious cash flow, and succeeded mightily in convincing Wall Street that HP couldn't care less about maximizing shareholder value.

But two important points need to be remembered here. First, former CEO Leo Apotheker is gone. Second, HP stock is almost comically cheap. If the company spent all of its annual free cash flow on share buybacks, it would repurchase itself entirely in about six years. HP may have some troubling days ahead of it, but its shares are priced for exactly that -- and more.

Eli Lilly
Eli Lilly is a smart choice for those looking for slow, stable, steady growth and consistent dividend income. You won't shoot the lights out with big pharma these days -- don't expect to get rich overnight -- but Eli Lilly and other large-cap pharmaceutical companies will continue to crank out cash flow for years to come. There's a difference between a dying company and a former high-growth company resigning into a period of boring-but-stable earnings. The latter is where I think a company like Eli Lilly is today. Patience will be rewarded.

If you're looking for other great stock picks amid this crazy market, check out the Motley Fool's free report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." It's completely free. Just click here to grab a copy.

Fool contributor Morgan Housel owns shares of Intel and Johnson & Johnson. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Ford Motor, Johnson & Johnson, and Intel. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Intel, and Ford Motor. Motley Fool newsletter services have recommended creating a bull call spread position in Intel, a synthetic long position in Ford Motor, and a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (57)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2012, at 4:34 PM, TheDumbMoney wrote:

    "There's a difference between a dying company and a former high-growth company resigning into a period of boring-but-stable earnings"

    <-- Cut-outs of this quote should be kept handy and occasionally should be pasted to the foreheads of all pure-growth acolytes that one meets.

  • Report this Comment On January 13, 2012, at 5:03 PM, tomd728 wrote:

    With the exception of LLY and JNJ this is a Motley

    bunch in terms of performance v the S & P.

    "Turning around" the likes of HPQ will be tougher

    than parking an aircraft carrier in mid-town Manhattan.Ford ? Get past the legacy expense and maybe.INTC ? Too many outside issues (industry demand) to take very seriously.

    I appreciate the mechanics of your selection process and hope for the best 2012 for yourself

    and all MFs.

    Tom Durkin

  • Report this Comment On January 13, 2012, at 6:14 PM, sachamay wrote:

    Intel will not only grow, I think it is going to take over the mobile chip sector by 2014. However, according to a poll I made, so far not everyone agrees. Help me get more results by voting and sending it to your friends so we can accurately see what people really think!

    http://www.criticalpoint.co/blog-2

  • Report this Comment On January 13, 2012, at 8:53 PM, wjcoffman wrote:

    INTCs real value is in their not outsourcing their brains. This will pay off in ways that can't be quantified at this time.

    LONG INTC

  • Report this Comment On January 14, 2012, at 12:18 PM, heyfred3000 wrote:

    Intel has a huge possible jump ahead, depending on how the low-power chips are accepted. China will be the benchmark, since they're in products there as we speak.

    Ford has already had its big jump, but may settle at 14-16 for the next couple of years if the Fusion takes off. I owe everything to this stock; as a car collector and "car guy" I logged on at my consulting job in April 2009 and put my vanishing IRA into Ford at just above $2. I sold at nearly $17, and now I don't work. And my car collection now includes a used Citroën AX at my little house in Italy. If you're a big enough Fool, life can be good even in rough times.

  • Report this Comment On January 14, 2012, at 6:02 PM, sachamay wrote:

    I posted a link earlier, but this my actual article.

    This aims to convince that Intel will take over phone and tablet chips. It's a great read because it's simply laid out, easy to understand, and interesting. It also revealed something that I never new about ARM. Check it out:

    http://www.criticalpoint.co/blog-2

  • Report this Comment On January 15, 2012, at 2:11 AM, mikecart1 wrote:

    I only agree with INTC and JNJ. The other 3 are unreliable. People will always need computer devices and Intel owns that. People will always need to wipe their butt and JNJ owns that.

  • Report this Comment On January 15, 2012, at 9:32 AM, joemas wrote:

    Like intel but prefer to sell put spreads.

    Intel

    "Five years ago, Intel earned $1.20 a share. Its stock price? About $25. Last year, Intel earned $2.30 a share. Its stock price? About $25.

    Intel is among a handful of large-cap tech companies that have seen their business, earnings, and cash flow zoom ahead while their stocks languish. Trading at a multiple to earnings and cash flow that implies no earnings growth -- a highly unlikely prospect -- and throwing off a 3.3% dividend yield, Intel is one of my favorite companies for investors looking for good, high-quality blue chip investments to hold for the long run."

    If you own 100 shares of INTC for $2500 you can earn approx $21 per quarter because of the dividend for a total of $85 for the year. Nice dividend for holding the stock....

    What if you bought a 20-22.50 call cspread for the year. No DIVIDEND but the Jan 13 spread would cost 5.64 -3.90 = 2.74 and net you 2.50 or loss of 24 cents.

    20.00 INTC130119C00020000 5.64 0.56 5.60 5.70 70 24,342

    22.50 INTC130119C00022500 3.90 0.44 3.80 3.90 178 31,355

    25.00 INTC130119C00025000 2.40 0.40 2.37 2.41 1,083 49,569

    What if you bought a 20-25 call cspread for the year. No DIVIDEND, again, but the Jan 13 spread would cost 5.64 -2.40 = 3.20 and net you 5.00 or net of 1.80 cents / share. giving you $180. Better than the dividend but the stock must hold the $25 stock price. You have $320 for the one spread at risk and you make $180 or 56%, this seems to be much better than owning the stock and getting $85 dividend.

    Lets take a look at PUT options for a year. Now we want to have a safety margin so we will look at two spreads.

    17.50 INTC130119P00017500 0.74 0.09 0.72 0.75 180 28,626

    20.00 INTC130119P00020000 1.20 0.10 1.20 1.23 290 57,352

    22.50 INTC130119P00022500 1.96 0.19 1.95 1.98 5 41,116

    What if you sold a 20-17.50 put spread for the year. No DIVIDEND but the Jan 13 spread would net you 1.20 -0.74 = 0.46 or $46 for the year. You have 250 at risk and you get $46 or 18% and it is pretty safe to say that the stock should stay above $20.

    YOu can do the math ($76 for 22.50 - 20 spread or 30%) but it seems like a safe option either call or put gets you much better results than owning the stock. I have another way to look at intel that can make you money nearly 6 times per year and have as low a risk profile as the put options.

    Trade it every 2 months with a bit higher stock spread. Below is the March option and would make 18 cents ($18 for $100 spread) in two months for $82 (100-18) at risk or 21% for a 23-22 spread. Do that 6 times and you could make up to 126% over the year. You would adjust your option spread every 2 months or so. try to avoid the earning months, so you might have to go one month and then three just after earnings but you do not have the risk of a earnings down surprise.

    22.00 INTC120317P00022000 0.27 0.04 0.28 0.29 24 6,683

    23.00 INTC120317P00023000 0.45 0.09 0.45 0.46 297 11,888

    24.00 INTC120317P00024000 0.69 0.14 0.70 0.72 600 3,671

    Over the last year INTC has ranged from 19 to 26. If the stock does drop below 23 you have only $82 loss at max since you own the 22 put, but initially received 18 for selling the spread. You can roll the put option out another two months to a lower strike and not have the cost of the loss if it is between 22 and 23. You might even make a few cents but now your risk is 22 to 21. So the choice is yours. Pick a pretty stable stock and buy it, buy option call spreads or sell option put spreads to make money during a year where most experts say the market will be flat again.

  • Report this Comment On January 16, 2012, at 6:29 PM, ALLWIN wrote:

    Morgan can you please enlighten this through-breed ignoramus?

    What values or range of values should we consider as the "best / most sought after value / range of values'' for the metrics:-

    Enterprise Value/ Unlevered FCF and

    the 5-Year Average?

    Thanking you in advance, I look forward to your reply with interest.

  • Report this Comment On January 17, 2012, at 2:13 PM, captainvalue wrote:

    In using EV/FCF, you must subtract any interest earnings on cash/equivalents from FCF. This is not a big issue now with interest rates where they are, but worth remembering. Also, tough to use the 5 yr avg these days due to the wild swings over the last 5 years (i.e., big std dev in those averages). I do like to look at long-term FCF yield to EV, how it trends, is it growing, etc vs just comparing vs previous multiples. If you buy a co with decent growth prospects at a high FCF yield, and that yield is likely to grow, things are in your favor. (Long JNJ and INTC)

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