Credit-Quality at Bargain Prices By Dave Sterman CNBC.com Contributor
cnbc.com
Wednesday, June 27, 2001 03:11 PM
With the economy hitting the brakes, many investors have grown concerned
that debt-laden companies may eventually have trouble meeting their
obligations. Debt has to be serviced and that cuts into the bottom line.
This is a legitimate concern, particularly in a downturn. Previous slumps
have triggered spikes in bankruptcies. Filing for bankruptcy is an efficient
way to start driving your stock price down toward zero.
Not surprisingly, investors have begun to shun companies with a lot of debt.
An easy way to judge a company's viability is to look at its credit rating.
Bondholders must pay special attention to credit ratings. Stockholders
should keep it in mind as well.
Companies with strong credit ratings tend to be particularly well-positioned
to weather an economic downturn and emerge ready to move on to greener
pastures. Stronger credits are also better prepared if the economy does
lapse into a real recession, which has not happened yet.
So this week, we searched for stable large-cap companies with that earn high
credit ratings. Every stock on the list carries an average debt rating of
A-minus or higher. (The credit-rating agencies work with slightly different
ratings, but they all agree that an "A" rating is a sign of safety).
Many companies with top credit ratings have taken it on the chin recently in
the stock market. To find what may be the best bargains, we tightened the
parameters of our screen by looking for blue chip stocks that have traded
off more than 30% in the last six months.
The five stocks we found, listed on the table below, appear poised to thrive
over the long haul. In the case of American Express {AXP, News, Boards} and
Computer Sciences Corp. {CSC, News, Boards} near-term economy-related
concerns could well weigh on their shares for a few more quarters.
All five stocks are trading at multiples not seen since the last recession.
AEGONStocks of insurance companies are typically shunned by go-go growth
investors. But shares of operators such as American International Group
{AIG, News, Boards} or AFLAC {AFL, News, Boards} have performed quite well
in recent years.
Shares of Netherland-based AEGON {AEG, News, Boards}, by comparison, haven't
fared as well. Some blame it on the company's low-profile here in the U.S.
Others cite a springtime sell-off associated with a secondary stock
offering.
Whatever the reason, analysts now conclude that this large insurer is a
relative bargain. Stephens Inc's Neil Fisken notes that the shares trade for
just 15.2 times projected 2002 earnings estimates. That's a "significant
discount to its historical average."
In fact, during the last economic downturn, when AEGON's earnings were at
sub-par levels, the shares trade for 46 times projected earnings. Fisken
sees the shares hitting 50 in the next 12 months, roughly 80% above current
levels.
Salomon Smith Barney's Gareth Pulman thinks AEGON is a smart play on the
ever-strengthening U.S. dollar. "Traders may wish to note that AEGON's share
price has almost always reacted positively to prolonged weakness in the
euro," he said. If current exchange rates persist, Pulman expects to raise
his earnings forecasts by 6% for 2002 and 2003.
Banc of America's Jason Zucker recently upgraded his rating on AEGON to a
"strong buy." He acknowledges that some investors are bearish on insurance
companies with a large U.S. exposure, but "we believe the operating
environment will improve in the latter half of 2001 for the industry, and
AEGON's business."
Radio ShackSales of cell phones, personal digital assistants (PDAs) and
other electronic gadgets have slowed sharply in recent months, taking down
the stock of Radio Shack {RSH, News, Boards}, a prime purveyor of digital
wares.
But analysts think the sales slowdown is merely a 2001 event, and that this
is a great time to load up on Radio Shack. Midwest Research's Todd Kuhrt
recently upgraded his rating on the stock to a "buy," noting that the
electronics retailer's "business is still fundamentally solid and can
produce EPS growth of 12 to 15% over the next three to five years as the
economy rebounds.
Sales at Radio Shack are not actually as weak as you may expect. Same store
sales comparisons are merely flat with year-ago comparisons, below the 10 to
15% monthly gains investors had come to expect.
But cooling sales has caused shares of Radio Shack to slump nearly 50% in
the last six months. During that time, shares of Best Buy {BBY, News,
Boards}, a key competitor, have nearly doubled. That's left shares of Radio
Shack selling at a significant discount. While analysts generally expect
both firms to boost profits 15 to 20% in 2002, Best Buy trades at 22 times
that forward outlook, while Radio Shack trades at just 13.5 times projected
profits.
Bear Stearns' Dana Telsey concurs. "We continue to believe the company holds
one of the strongest retail brands," she writes, adding that Radio Shack is
currently improving many of its operational practices, leading to a more
efficient financial performance. She figures the retailer "has the potential
to maintain a base level of earnings in the face of top line erosion."
5 Solid Stocks with Excellent Credit
Ticker, Name, Credit Rating, Stock Price, 26-Week Change, Projected P/E This Year
AEG AEGON N.V. AA-minus -31.22 17.60
AXP American Express A-plus -32.09 19.29
CSC Computer Sciences A -45.64 19.48
GLW Corning Inc. A -79.22 18.54
RSH RadioShack A-minus -47.61 15.56
Note: Top ratings start at AAA. Source: MarketGuide |
