With the stock market surging 19% in 2017 and hitting all-time highs to start 2018, finding companies that represent a compelling value can be a difficult proposition. The task becomes even more problematic because in many cases, if a stock hasn't followed its contemporaries to lofty heights, there's usually a good reason. Undertaking to separate the trash from the treasure can be daunting.
With that in mind, we asked three Motley Fool investors to choose companies they believed provided great values today. They offered convincing arguments for Walmart Inc. (NYSE:WMT), The Walt Disney Company (NYSE:DIS), and Synchrony Financial (NYSE:SYF).
A retail winner
Jeremy Bowman (Walmart): Walmart stock tumbled last week after the retail giant disappointed in its fourth-quarter earnings report, and shares had their worst day in two-and-a-half years, falling 10%. Investors were disappointed with a slowdown in U.S. e-commerce growth from 50% in the third quarter to just 23% in the fourth, and earnings missed estimates. However, there were some bright points in the report, including 2.6% comparable sales growth at Walmart U.S. stores and 4.4% comp sales growth on a two-year basis, its best performance in eight years.
The question for investors is whether the slowdown in e-commerce growth, which seemed to be the main cause of the sell-off, is a blip or evidence of a larger trend. Considering management is still calling for 40% e-commerce growth in 2018, I'd say it's a blip. The superstore chain is adding another 1,000 grocery pickup locations to the more than 1,100 it already has, and grocery pickup has been the primary driver for e-commerce growth.
CEO Doug McMillon has also been highly successful at setting goals for the company and knocking them down. In 2015, he told investors that earnings would fall the following year and not return to growth until this year (fiscal 2019) as the company invested in things like higher wages and cleaner stores. With the help of the Jet.com acquisition, the company is on track to do exactly that after making smart moves to turn around the business.
For the current year, Walmart sees adjusted earnings per share improving from $4.42 to $4.75-$5.00. At the high end of that range, it has a P/E of less than 19 today, a great price for a retailer putting up strong comparable sales growth as it pivots to e-commerce.
Danny Vena (Disney): There has been much wailing and gnashing of teeth about the advent of streaming television, cord-cutting, and the resulting declines of subscribers at ESPN and Disney's other cable networks. These fears have led many to give Disney a wide berth, but I think that's a mistake and is creating a tremendous opportunity for value investors.
Disney currently trades at 14 times trailing earnings, a huge bargain compared to the multiple of 25 held to the S&P 500.
It's important to note that a certain amount of concern is justified. Disney's media networks segment, which houses its broadcast and cable networks, accounted for 42% of the company's $55.6 billion in revenue and 49% of its $15.7 billion in operating income for fiscal 2017. The prospect of losing such a large segment of its financial base is certainly worth considering.
Investors should know, though, that Disney is not sitting idly by waiting for the inevitable.
Late last year, Disney announced that it would debut its own direct-to-consumer streaming services. The first, dubbed ESPN Plus, is expected to launch this spring. The service will cost $4.99 and provide thousands of live sporting events and documentaries not available on the flagship ESPN channel.
The second streaming option, expected in 2019, will "become the exclusive home in the U.S. for subscription video-on-demand viewing of the newest live-action and animated movies" from Disney, Pixar, Marvel, and Lucasfilm.
Disney's other segments have been stepping in to pick up the slack. In its most recent quarter, revenue was up 4%, while profits climbed 22%, both year over year. This was due largely to the performance of the parks and resorts segment, which grew sales 13% year over year. Black Panther, meanwhile, has been tearing up the box office with record-setting ticket sales week after week.
A growing contribution from its other segments should give the House of Mouse additional breathing room while it ramps up its streaming efforts.
A better card company
Jordan Wathen (Synchrony Financial): This bank makes its money in an unusual way. It's a private-label card issuer, acting as the bank behind many of the store credit cards issued by some of the largest and best-known retailers including Walmart, Gap, Lowe's, J.C. Penney, and more.
Retailers simply love store cards. It gives them another avenue to monetize customer relationships, collect more data about each customer (what they buy, and when), and save on swipe fees that they would usually pay to process an ordinary credit card.
For Synchrony Financial, having partnerships with retailers means having a massive salesforce (retail employees) working to push credit cards to new customers. Synchrony Financial earns a healthy spread on balances, as it last reported a net interest margin of 16.2%, buoyed by the high rates of interest charged on store cards.
Synchrony Financial's earnings power in 2017 was muted as it built up reserves against credit losses. Allowances for credit losses last stood at 6.8% of its loan book, up from 5.7% last year. I think the worst of the allowance build is behind it, so in 2018, more of its earnings power will make its way to the bottom line. At 2.2 times tangible book value, shares are an attractive value in a banking industry largely devoid of clear bargains.
Danny Vena owns shares of Walt Disney and has the following options: long January 2019 $85 calls on Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Lowe's and Synchrony Financial. The Motley Fool has a disclosure policy.