During the shopping season, everyone's on the hunt for a bargain. Value investors should keep an eye out, too, for companies that are trading at serious discounts. But just like in shopping, it pays to be wary of what's on the clearance rack: it could be damaged, outdated, or just...not worth buying.
Three companies that are currently trading at surprisingly low valuations are Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), Oshkosh Corporation (NYSE:OSK), and Plains All American Pipeline (NYSE:PAA). Let's take a closer look to see if they're one-of-a-kind steals...or better left on the shelf.
Odd man out
The five oil majors tend to be pretty predictable value stocks. Because of their massive size, they're able to take advantage of economies of scale to churn out reliable cash flow and dividend payments to their shareholders. And while their production operations may be somewhat affected by oil and gas price swings, their downstream (refining and marketing) arms can usually buoy them through such tough times.
As you might expect, over the last five years -- that is, since the big oil price downturn of 2014 -- these reliable cash-producing machines have all seen their valuations improve. Wait, did I say "all?" Not quite! Four of the five have watched their price-to-earnings ratios rise between 54.8% (French oil major Total) and 111.2% (British giant BP), but one P/E ratio has actually gone down by 9.1%. That dubious distinction belongs to Royal Dutch Shell.
Sure enough, Shell's current P/E ratio of 11.8 is by far the lowest of its Big Oil peers, whose ratios range from 15.1 (Total) to 26.7 (BP). This isn't just a fluke, either. By another valuation metric, enterprise value to EBITDA, Shell is likewise the lowest. Despite consistently churning out strong performance, Shell's share price has declined by 10.9% over the last five years, even as its net income has soared by 37.6%.
This situation certainly screams "absurd," given Shell's reliable dividend history, juicy 6.4% current yield, and strong management team. Value investors may want to take this opportunity to jump in now.
When President Trump was elected in 2016, shares of Wisconsin specialty truckmaker Oshkosh Corporation soared almost overnight. It's easy to see why. The promise of increased defense spending (which materialized) and a trillion-dollar infrastructure package (which didn't) seemed tailor-made for the manufacturer of military and construction vehicles.
But by 2018, with Democrats poised to take over the House of Representatives, an infrastructure plan that seemed to be going nowhere, and concerns about how the trade wars were affecting the price of steel -- a key component in trucks -- the market began to rethink its bullishness on Oshkosh, and it sold off the stock.
However, since then, Oshkosh has continued to execute well despite these challenges, posting strong back-to-back earnings in Q3 and Q4 of its FY2019 (which ended Sept. 30). But while the share price is approaching a record high, the company is still trading at only 11.3 times earnings, near the low end of its historic range and lower than fellow heavy equipment makers Caterpillar (14.0 times earnings) and Deere (17.0 times earnings).
This could be a case of a once-bitten market being twice shy about jumping back into Oshkosh, but investors should definitely take a closer look at this unique American company.
Slow(er) but steady can win the race
One great place for value investors to look is the energy infrastructure sector. Companies engaged in the capital-intensive business of building pipelines and terminals for oil and gas can churn out reliable cash flows that are returned to shareholders as dividends. There are also plenty of companies in the space structured as master limited partnerships (MLPs), which are granted tax-advantaged status in exchange for paying out nearly all of their cash flow as distributions to unitholders (the MLP version of paying dividends to shareholders).
One company in this space that's looking strangely undervalued right now is pipeline MLP Plains All American Pipeline. Although the partnership has a checkered past -- including back-to-back distribution cuts in 2016 and 2017 -- it's paid down some of the massive debt that prompted the cuts in the first place. Factor in the company's strong recent performance, and its debt load now sits at just 2.3 times EBITDA, down from more than 6.0 times EBITDA only last year.
However, in spite of the good performance and a 2019 distribution hike, Plains' unit price has slumped. It's down 8.9% for the year, which has boosted the MLP's yield to a tasty 7.6%. Currently, units are trading at just 5 times trailing earnings, while Plains' enterprise value is just 5.5 times EBITDA. Every other major pipeline MLP trades at double-digit multiples by these two metrics.
Even factoring in Plains' past stumbles, its current valuation seems absurdly low.
More than just metrics
Royal Dutch Shell, Oshkosh, and Plains All American Pipeline are currently sporting valuations that seem absurdly low. But the full story of a company is more than just numbers and ratios. That's why it's important to also factor in a company's prospects for continued outperformance.
Luckily, these three companies have been turning in strong results and have good future prospects. Investors looking for value stocks at bargain prices should stop and take a closer look.