With the stock market regularly hitting new all-time highs, value investors are hard-pressed to find a company that isn't exorbitantly priced. But there are always a few stocks that aren't carried along by the euphoria and end up being overlooked by investors for the wrong reasons. We asked three Motley Fool investors to put together three stocks they think are great values in today's market. They chose Cheniere Energy Partners (LNG 3.52%), Sabra Health Care REIT (SBRA +1.34%), and Kroger (KR 0.86%).
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Too much focus on today's valuation
Tyler Crowe (Cheniere Energy Partners): By any conventional valuation metric, shares of Cheniere Energy Partners don't look like value investments. Shares currently trade at an enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 38.8 times. Heck, even growth-stock investors would blush at a price that high. What that valuation doesn't take into account, though, is the situation on the ground at Cheniere's Sabine Pass LNG export facility.
This past quarter, Cheniere Energy Partners had its best quarter ever with $285 million in EBITDA, thanks to full commercial operations at two of its liquefaction-processing trains. Even if we were to use this EBITDA on an annualized run rate, it would bring the valuation down to a more reasonable 21.4 times.
Here's where it gets even better, though. By the end of 2017, the company expects to have four of the five liquefaction trains complete and commercially operational. Considering how much of the facilities' revenues are already locked into 20-year contracts with little to no commodity risk, it's pretty reasonable to assume that the company's results over the next two quarters will be substantially better from here.
Everything isn't all gravy from here, though. Because of some wonky financing deals a few years ago, Cheniere Energy Partners is about to undergo some significant shareholder dilution as Class B shares fully vest in the third quarter. That will slow down the rate at which the partnership can increase its payout to investors. With shares currently carrying a distribution yield of 5.5% and the company's operating income about to explode over the next year, Cheniere Partners' current share price doesn't fully value its earnings power.
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A bargain price for a business focusing on a growing need
Chuck Saletta (Sabra Health Care REIT): As America's population continues to age, businesses that serve the needs of the elderly are very likely to remain in demand. Sabra Health Care REIT owns 182 properties throughout the U.S. and Canada that largely focus on skilled nursing care and senior living, putting it in a good position for that long-term demographic trend.
Despite that strong position for the future, Sabra Health Care REIT trades at a reasonable price today. Its shares fetch a mere 16 times its trailing earnings and, as a REIT, it's required to pay out at least 90% of its income as dividends in order to qualify for preferential tax treatment. Its shares carry a 7.4% current yield, and with a business that's expected to grow its earnings by around 6% annualized over the next five years, that combination adds up to a decent potential total return.
Sabra Health Care REIT is also in the process of expanding through acquisition -- via a pending merger with Care Capital Properties (CCP +0.00%). That combination will be financed with stock. Structuring it that way is expected to help improve the balance sheet of the combined business, making future financing for organic expansion and debt refinancing that much more affordable over time.
Scale and balance-sheet strength are important parts of a company's ability to thrive over the long haul, particularly in the capital-intensive real estate business. The combination with Care Capital Properties will help Sabra Health Care REIT on both fronts, further positioning it well for the future. It's rare to find a company so well positioned for the future that trades at such an attractive valuation today, and that makes Sabra Health Care REIT a value stock worth considering today.
Image source: Kroger.
Still an industry stalwart
Rich Duprey (Kroger): The market is putting too much faith in Amazon.com's ability to conquer the supermarket industry with its purchase of Whole Foods Market. This gives investors the chance to pick up one of the best companies at a big discount: Kroger (KR 0.86%).
The largest grocery-store chain behind Wal-Mart, as well as the largest traditional-supermarkets operator, Kroger continues to gain market share as it has for the past 12 years. Recently, it has come under competitive pressure and surprised investors with news that it would trim it earnings guidance this year. The combination of a promotional environment, food-price volatility, lower store traffic, and the merger of Amazon and Whole Foods are the main reasons why this grocery-store chain saw its stock plunge 20%, and it now finds itself down 33% for the year.
While the concerns shouldn't be minimized, they're also a bit overblown. Whole Foods, after all, has a less-than-2% share of the grocery-store market compared to almost 9% for Kroger. The latter also continues to innovate, and has implemented many improvements in online shopping, customer pickup, and delivery.
Essentially, the market is discounting any chance of Kroger recovering its footing while bolstering the competition's chances of taking down the industry leader. It's financially sound, has a capable management team, a plan for turning itself around, and meeting the challenges of the supermarket's new dynamics. Kroger's beaten-down valuation is an opportunity for investors who see that Wall Street overreacted.
