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Wednesday 16

January, 201911:27 PM



TheBull PREMIUM

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Growth Stocks with Low P/E and High Yield

Growth Stocks with Low P/E and High Yield

By Bob Kohut 19.05.2014


While some people may argue that buying stocks is nothing more than a gambler’s art, knowledgeable investors are well aware there is a bit of “science” mixed in with the art. The science is in the substantial array of numbers that can serve as clues to the health of a stock while there is a certain amount of “art” involved in interpreting the numbers.

Contrarian and value investors look to low Price Earnings (P/E) Ratios to indicate negative market sentiment towards a stock.  Some add high dividend yields to their stock-picking criteria and others opt for high future growth estimates.  

We scoured the share tables as of 13 May for the ASX Top 300 companies and found a healthy mix of stocks with both current and forward P/E’s under 10 and dividend yields above 3.5%.  Contrarian and value investors are frequently warned that sharp declines in share price drive down the P/E and drive up the yield, sometimes masquerading a stock in trouble as a bargain stock.  To test that assumption, we can see how many of the stocks  selected have low or negative growth forecasts to go along with the low P/E-high yield combination.

We begin with five stocks from one of the most volatile sectors on the ASX – the miners.  While the mining boom was at its height, iron ore miners invested heavily to expand production capacity.  The question for debate now is whether global demand for steel can absorb the excess production.  The debate appears to be settled about the boom in mining expansion.  That boom has withered away, devastating the shares of many mining service providers.  The following table paints an interesting picture of a few of Australia’s top mining companies.

Company
(CODE)
Share Price
52 Week % Change
P/E
Dividend Yield
Forward P/E
5 Year Estimated P/EG
2 Year Earnings Growth Forecast
2 Year Dividend Growth Forecast
Atlas Iron
(AGO)
$0.78
-8%
8.16
3.87%
7.05
0.18
+164%
0.0%
BC Iron
(BCI)
$3.97
+20%
4.41
8.56%
5.38
0.83
+5.9%
-8.2%
Fortescue Metals (FMG)
$4.70
+38%
4.91
4.26%
4.95
0.34
+42.3%
+69.8%
Mt Gibson Iron (MGX)
$0.79
+63%
4.34
5.06%
9.88
-0.14
+8.3%
-1.5%
Regis Resources (RRL)
$2.32
-36%
9.32
6.47%
8.59
21.9
-6.3%
-2.6%

 

Both the ASX 200 XJO Index and the XMJ Materials Index are up around 10% year over year.  Three of the stocks on the table have bested that number, with Mt Gibson Iron (MGX) and the once beleaguered Fortescue Metals (FMG) leading the way.  Going strictly by the numbers, Fortescue looks very attractive.  Both the current and forward P/E (through FY 2015) are under 5; the 5 year price to earnings growth is stellar; and analysts see sizable increases in both earnings and dividends over the next two years.

Of course, the numbers are based on assumptions about the iron ore price and its demand. The following one year price chart for FMG and MGX shows the rise and fall in iron ore shares, roughly coinciding with the price of iron ore.

The price is weakening and the Treasury Department is the latest economic authority to voice its opinion on the future, with a nasty outlook.  The recently released budget papers call for a decline to $US93 per tonne this year, with a possible continual fall to as low as $US83 per tonne within two years.

Analysts and experts have been wildly off in past forecasts.  The miners have reacted to the volatility by slashing costs dramatically to protect profitability.  Fortescue has reduced its cash costs with management now stating a break-even price of $US 70 per tonne.    

Despite impressive results reported in its March quarterly report, Atlas Iron (AGO) has slipped into negative territory in the last week.  The company had record shipments, reaffirmed full year production guidance at the high end, and reported quarterly cash operating costs between $49 and $52 per tonne.  Analysts estimate the breakeven cost for Atlas between $75 and $80 per tonne.  Atlas is planning a major expansion in its Pilbara operations, adding rail infrastructure and a hub for processing its ore. It should be noted AGO’s dividend is unfranked while all other miners in the table have fully franked dividends.

Consensus analyst opinion for the current month is Hold for MGX, and Overweight for AGO, BCI, FMG, and gold miner Regis Resources (RRL).  With the price of gold in a gradual decline and now under $US1300 per ounce, Regis shares have run counter to the general trend of the iron ore miners.  The following one year chart compares RRL to AGO.

Mining services providers face the question of making up for lost revenue due to the shrinking of mining expansion projects.  Here are six service providers with low P/E’s and high yields.

Company
(CODE)
Share Price
52 Week % Change
P/E
Dividend Yield
Forward P/E
5 Year Estimated P/EG
2 Year Earnings Growth Forecast
2 Year Dividend Growth Forecast
Austin Engineering (ANG) $1.56
-70%
9.51
9.6%
5.38
-10.53
-14.7%
-10.5%
Ausdrill Ltd
(ASL)
$0.925
-30%
5.17
8.65%
6.17
-3.19%
-30.4%
-23.4%
Decmil Group
(DCG)
$1.86
+10%
6.83
6.7%
6.02
3.07
+18.7%
+4.5%
Maca Ltd
(MLD)
$2.04
+2%
5.86
5.88%
--
--
-1.1%
+8.6%
Mineral Resources (MIN)
$11.44
+24%
8.57
5.42%
8.87
0.78
-6.4%
+1.3%
NRW Holdings (NWH)
$1.06
-9%
6.27
8.49%
5.89
0.28
-23.6%
-25%

 

Decmil Group Limited (DCG) and Mineral Resources Limited (MIN) standout from the rest, with DCG showing a superior 2 year forecast for both earnings and dividends while analysts see a long term edge for MIN with a 5 year estimated P/EG of 0.78.  While both are diversified, Mineral Resources provides services such as crushing and ore processing along with plant maintenance that should benefit from higher production across the iron ore mining sector.  Decmil provides housing for construction workers, which obviously is suffering, along with servicing the oil & gas sector, government, and infrastructure providers.  While not lacking in volatility, both DCG and MIN have remained positive and have an impressive five year share price performance.  Here is the chart.

Austin Engineering Limited (ANG) serves as a reminder to be wary of investing on dividend yield alone.  At a lofty 9.8%, the yield is the highest of any stock in the mining sector, but the price action explains the yield.  Along with fellow laggard, Ausdrill Limited (ASL) the future growth prospects are bleak. In sharp contrast to Decmil and Mineral Resources, ASL and ANG have not been kind to shareholders over the past five years.  Here is the chart.

Maca Limited (MLD) is another service provider with most of its operations involved with mining production, including crushing, screening, and material haulage. It counts Atlas Iron as one of its customers; Maca stands to benefit from AGO’s expanding production capacity.  Maca is the only mining sector company from the tables with a consensus Buy rating. The stock has 5 Buy ratings and 1 Overweight.

Finally, we have six stocks from non-mining sectors.  Here is the table.

Company
(CODE)
Share Price
52 Week % Change
P/E
Dividend Yield
Forward P/E
5 Year Estimated P/EG
2 Year Earnings Growth Forecast
2 Year Dividend Growth Forecast
Acrux Ltd
(ACR)
$1.01
-74%
5.37
7.7%
9.18
0.25
+147.1%
+9.1%
Codan Ltd
(CDA)
$0.71
-78%
5.34
11.6%
7.1
-0.61
-31.1
-32.1
Cabcharge Australia (ACB)
$4.10
-15%
7.81
6.6%
8.37
-35.48
-6%
-7.2%
Maxitrans Industries (MXI)
$0.90
-30%
7.24
8.84%
8.23
0.19
-2%
-4.2%
Seven West Media (SWM)
$1.86
-18%
8.70
6.47%
--
--
-5.3%
-1.3%
Southern Cross Media (SXL)
$1.09
-27%
7.96
8.26%
7.79
1.36
-2.4%
+1.9%

 

Biotechnology Company Acrux Limited (ACR) appears to be the lone standout here with very impressive future earnings forecasts, despite its hefty 74% year over year decline in the share price.  The company offers a variety of health care products administered directly to the skin and its flagship product, Axiron (a treatment for low testosterone disorders), is wobbly. The share price rocketed back in 2010 on the news that Acrux reached a licensing agreement with US based Eli Lilly but the US FDA (Food and Drug Administration) is now examining claims that Axiron, along with other testosterone treatments, increases the risk of stroke and heart attack.  The claims were made in two separate studies, but at least one study is under dispute.  

Biotechnology stocks offer great rewards at great risks.  While this is a high risk stock right now, the company does have other products in the market and the sprays and liquid treatments applied directly to the skin have potential in a sector with a bright long term future.  Here is a ten year price chart for ACR that amply demonstrates the risk.

The other stock that bears mentioning based on an impressive 5 year estimated P/EG of 0.19 is Maxitrans Industries Limited (MXI).   This trucking and trucking parts company may be down 30% year over year, but the share price rose 300% over five years, benefiting from the resources boom as its trucking equipment was in high demand.  Full Year 2013 results reported last year showed record revenues and profits but guidance was subdued and the stock price plummeted.  Here is the one year chart for MXI.

Half Year 2014 results confirmed management’s prior cautious outlook as revenues declined 2% and NPAT fell 20%.  This stock may be risky in the short term but the company has an impressive track record.  MXI has increased revenue every year over the last three and more than doubled dividends and net profit in each of those years.  Total shareholder return on an annualised basis has been outstanding, at 67.4% over 3 years; 37.9% over 5 years; and 9.2% over 10 years.  

Of the remaining stocks in this table, only Codan Limited (CDA) can look back to a once promising past.  Here is a five year price chart.

The company makes high tech products for radio communications, metal detection, and mining technology.  In addition to the diminishing demand in its mining technology products, the metal detection line has suffered from counterfeit products and political instability in its key distribution area – Africa.  Half Year 2014 results were reported in February and they gave little hope to investors.  Revenues declined from $135.9 million in the previous corresponding period (pcp) to $61.1 million and NPAT fell from $26.5 million to $4.8 million.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.

Click on the links below to read other articles from this week's newsletter

1. 2 Stock Winners From The Budget: Federal budget will add further pressure to an...

2. 18 Share Tips - 19 May 2014: 18 Share Tips to BUY, SELL & HOLD from...

3. 3 Standout Tech Stocks: The sell-off is creating opportunities in some...

4. Bullish currency opportunities coming: Currently the USD Index trades at similar...

5. Growth Stocks with Low P/E and High Yield: The miners have reacted to the volatility by...

6. How will the economy react to the budget?: Given the delicate state of Australia's...

7. 'Repair cafés' are about fixing things - including the economy: Mending represents a deliberate attempt to...

8. Top 10 shorted stocks: Each day we feature the top 10 shorted stocks...

9. Stocks on a roll: ASX rolling 52-week highs for the previous...

10. Stocks on the slide: ASX rolling 52-week lows for the previous...

 



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