Finding stocks trading below book value per share can sometimes turn up companies that are undervalued and worth further analysis. In accounting jargon, book value is a company's total assets minus liabilities and is sometimes referred to as shareholders' equity.
The catch is that these companies typically don't have a great record of generating high returns, which is one reason they are trading below the value of their net assets. This is currently the case for Calvin Klein owner PVH (PVH -2.97%), AT&T (T -0.20%), and Paramount Global (PARA -1.21%), which are all trading below their book value at the time of writing.
All three stocks have significantly underperformed the S&P 500 index over the last five years, which is one reason why the market isn't too excited about them. But a few notable investing experts believe these three stocks are primed for a rebound. Let's dig a little deeper and find out why they might be undervalued.
PVH is one of the largest apparel companies, with $9 billion in revenue. In 2021, Tommy Hilfiger comprised 51% of the business, while Calvin Klein made up 40%. Other brands under its corporate umbrella are Warner's, Olga, and True & Co., which contributed the balance of revenue.
The company experienced a nice recovery last year from the pandemic, with revenue jumping 28% year over year. Calvin Klein was the strongest performer, with revenue up 39%. But what stands out is the improvement in profitability.
PVH reported adjusted earnings per share of $10.15, up from $9.54 in 2019. This translated to a new high of 12% in return on invested capital. Before the pandemic, the company consistently generated a return on capital below 10%.
In the first quarter, a handful of fund managers, including Harry Burn at Sound Shore, Viking Global Investors, and Lee Ainslie at Maverick Capital, bought shares.
In April, management laid out its PVH+ strategy to improve the company's growth and profitability over the next three years. PVH is targeting $12.5 billion in revenue by 2025, with operating margin expanding to 15% and free cash flow reaching $1 billion or more. To reach these goals, management plans to focus on penetrating large markets that demonstrate the most consumer demand for its brands. The company also plans to create a digital-first operating model while improving operating efficiencies to be more competitive.
Clearly, if management executes, and it seems the previously noted value investors believe they will, the stock could be a bargain at 0.78 times book value. On a price-to-earnings (P/E) basis, the stock trades at a multiple of 6.8 times 2022 earnings guidance. That is really cheap, considering the average P/E ratio for most companies historically ranges from an earnings multiple of 15 to 20.
Inflationary pressures are expected to impact PVH's business this year, but that's why long-term investors can buy the stock at a very cheap price. PVH is an interesting apparel stock to consider, especially given its top apparel brands like Calvin Klein that have been around a long time.
Another potentially undervalued stock is AT&T. David Rolfe of Wedgewood Partners and Lee Ainslie were buying the stock in the first quarter. The stock trades at a low price-to-earnings ratio of 8.2 based on 2022 estimates and a price-to-book ratio of 0.89.
The reason AT&T could deserve a higher valuation over the next few years is the moves management is making to unlock more value from the company's assets. Over the last year, management has sold off non-core businesses, created a new stand-alone company for DirecTV, and completed the combination of WarnerMedia and Discovery to form Warner Bros. Discovery.
These moves allowed management to reduce AT&T's net debt by approximately $40 billion in April. Reducing debt and selling non-core businesses are two things investors usually applaud, but so far, the market is not awarding AT&T a higher valuation. That obviously has a lot to do with the worries over the economy and fears of a pending bear market. It certainly doesn't reflect the company's latest results.
AT&T's wireless mobility and broadband businesses are performing well. Excluding the recent asset sales and the impact of the WarnerMedia transaction, revenue increased 2.5% year over year in the first quarter. AT&T experienced its highest level of data traffic in 2021, and it also reported its best quarter of postpaid phone net adds in over a decade during the first quarter.
All said, AT&T appears to be in a stronger position after the financial moves management made recently. This should free up resources to invest in the future of 5G and broadband and drive better returns for shareholders.
At a current share price of $20.99, the stock is sitting just above its 52-week low of $16.62 and could be a great buy for the dividend, if nothing else. AT&T paid out 56% of its free cash flow in dividends to shareholders last year. The dividend yield is currently an above-average 5.22%.
3. Paramount Global
ViacomCBS changed its name to Paramount Global earlier this year, and along with that, the CBS All Access streaming service was rebranded as Paramount+. While Netflix lost 200,000 subscribers in the first quarter, Paramount's direct-to-consumer business added an impressive 6.8 million new additions to its streaming services, also including results from Pluto TV, bringing the total subscribers to 62 million.
The stock trades at 12 times forward earnings estimates for 2022 and just 0.90 times book value. The market is focused on the weak results across the board. While streaming revenue grew at a robust 82% year over year in the first quarter, TV media and revenue from Paramount theatrical releases were down. Total revenue declined 1% year over year.
Nonetheless, Warren Buffett's Berkshire Hathaway purchased 68.9 million shares in the first quarter. Keep in mind, given the relatively small position of the stock in Berkshire's equity portfolio, it may have been one of Buffett's investing sidemen -- Todd Combs or Tedd Weschler -- that bought the stock.
Regardless of which Berkshire guru invested in Paramount, it makes sense for one reason. Other than valuation, Paramount can monetize its content in different ways. It can make money off box office releases, paid streaming subscriptions, and ad-supported plans. The company also owns several top cable networks, such as MTV, Comedy Central, and Nickelodeon, and of course, it does well during the NCAA Tournament season on CBS.
For Paramount+, management believes the advantage of pulling different monetization levers -- advertising and paid subscriptions -- will lead to potentially higher average revenue per user over time compared to services that only offer paid subscription plans.
Economic headwinds could pressure Paramount Global's cable networks that depend on a healthy advertising market. But the worries over the near-term direction of the economy give long-term investors a chance to buy a leading entertainment provider at a ridiculously cheap price.