Everyone loves a good bargain, but that's a particularly strong trait among value investors -- those who thriftily peruse the stock market for companies trading for less than they are worth in the long term.
However, we're eight years into a bull market, which means it's harder out there for those seeking to buy dollar bills for 50 cents to find such deals. That's why we asked three of our Foolish contributors to come up with a few great value stock candidates for you. In response, they offered up Kinder Morgan (NYSE:KMI), Visa (NYSE:V), and American Express (NYSE:AXP). Here are the details on why these shares made the cut:
A vital energy infrastructure player at a low price
Sean O'Reilly (Kinder Morgan): Kinder Morgan operates everything from natural gas pipelines, energy transfer terminals, and refined products pipelines as one of North America's largest energy infrastructure operators. Its importance to the energy industry, in addition to a unique set of circumstances we'll get to in a minute, make it a fantastic pick for any thrifty value investor.
Kinder Morgan, along with the rest of the industry, has been caught up in a secular downturn -- a product of the precipitous drop of oil prices two years ago. While that's not a direct problem for Kinder Morgan, which makes most of its money as a toll-collecting middle man, not as an oil and gas producer, it did lead to a lack of confidence in the sector on the part of Wall Street. This was bad news for KMI, as it uses billions of fresh debt to fund its expansions and roll over its older debt. This modest "house of cards" caved in, and Kinder was forced to cut its precious dividend in the winter of 2015.
Fortunately for value-minded individuals who don't mind waiting a few years for a proper turnaround, the situation already seems to be on the mend. Interest coverage ratios continue to rise as Kinder's management rights the ship, sells off assets, and pays down high-interest debt. It should also be noted that those moves will likely bear fruit the years ahead, as the true reason for the dividend cut lay specifically in the decision to not hold back on growth plans just to preserve its shareholder payout – short-term pain for long-term gain. With a price-to-book ratio of just 1.34, according to S&P Global Market Intelligence (far below the 2.5x Price/Book assigned to peer Enterprise Products Parnters), Kinder Morgan is a fantastic pick for any thrifty investor.
When a cheap stock is also an excellent value
Jason Hall (American Express): There's a saying -- "Price is what you pay; value is what you get." -- that should remind us that just because something's cheap doesn't mean it's worth buying. But in the case of upscale charge card and business lender American Express, I think the market continues to give investors the opportunity to buy a very high-quality company for a bargain-bin price.
Yes, American Express has lost -- or walked away from, depending on whom you ask -- lucrative partnerships with Costco and others recently. Those moves have certainly hurt AmEx's earnings in recent quarters, and are expected to weigh on them for the next few quarters to come:
But it's not like the company is in a death spiral. To the contrary, American Express is still an absolute cash-cow business. Over the past 12 months, it has generated $5.22 billion in net income and $5.5 billion in free cash flow, even after big increases in spending on marketing and promotions in 2016.
And there's a huge opportunity for the company: The global middle class is set to grow by billions of people in the coming decades, a fresh batch of potential new customers as the global payments pie gets much bigger and wealthier.
At 14 times trailing earnings and 13.8 times next year's forecast, American Express is a top-tier company trading at a sale price. This is particularly true if the company is able to continue the recent trend of new customer growth it reported in late April, and drive profits higher.
Processing profits millions of time per day
Visa's revenue climbed an impressive 23% year over year last quarter, to $4.5 billion, thanks to its astute acquisition of Visa Europe last summer, and strong growth in payments volume (up 37% on a constant-dollar basis), cross-border volume (up 11% if you include Europe in your comparison to last year's Q1 results) and processed transactions (up 12% including Europe). On the bottom line, adjusted earnings grew 27%, to $2.1 billion, or $0.86 per share. And looking forward to the full year of 2017, Visa told investors to expect top-line growth to arrive at the high end of its previous guidance for 16% to 18%, which should translate to percentage growth in the mid-teens for adjusted earnings per share.
Of course, that raises the question of whether that growth is sustainable past the near term, given Visa's enormous size (its market capitalization sits around $212 billion as of this writing). But as I noted in a similar pitch for Mastercard (NYSE:MA) earlier this year, 85% of the world's retail payments are still being made with cash and checks.
"Looking ahead," said Visa CEO Alfred Kelly Jr. after last month's report, "we are continuing our efforts across the globe to electronify commerce and digitize economies to the benefit of consumers and societies alike."
Visa is also putting its money where its mouth is, repurchasing and retiring 19.1 million shares of class A common stock for $1.7 billion last quarter alone. If that wasn't enough, the board authorized a new $5 billion share repurchase program to bring its remaining funds available for buybacks to $7.2 billion.
With shares of Visa now trading at 23.4 times this year's expected earnings -- a reasonable premium considering its growth rate -- I think now is a great time for long-term investors to open or add to their positions.
Jason Hall owns shares of American Express, Kinder Morgan, and Mastercard. Sean O'Reilly has no position in any stocks mentioned. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan and Mastercard. The Motley Fool recommends American Express and Enterprise Products Partners. The Motley Fool has a disclosure policy.