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Seven of the world's best value shares

We've combined the stockpicking genius of three great value investors
November 6, 2012

One of the joys of stock screens is that they can provide insights into unfamiliar markets and companies that would otherwise be off the radar. We're exploiting the scope this offers by going on a global hunt for value plays with this week's stock screen. We've fused together stock screening techniques from three value-investing greats to try to find some of the world's best value plays.

Our hunt for value is focused on the constituents of the S&P Global 1200 index. This covers 31 countries and about 70 per cent of the world's listed companies by market cap. The index consists of larger companies, which should help us stay out of excessively treacherous waters in some of the more exotic markets.

Our main value criteria is based on Benjamin Graham's formula for calculating intrinsic value (see below). We're looking for share prices that trade at a discount of 50 per cent or more to this measure of their worth. But Graham only ever meant his formula to be used as an indication that a stock was worth further investigation, so we've employed an additional valuation metric - one favoured by another American value doyen, John Neff. Neff's valuation measure works in a similar way to a PEG ratio but takes into account dividend yield as well as expected earnings growth (see below). To pass our screen, stocks must have a Neff PE/total return ratio of less than 1.

Valuation ratios can only tell a relatively small part of a share's investment story. So stocks that qualify as 'value' plays must also pass several other tests aimed at determining their underlying quality. Firstly we've tried to use criteria that take into account Mr Graham's concerns about asset quality. We've also set further criteria based on Mr Neff's interest in earnings records and earnings forecasts. Then we've applied some dividend-focused tests as advocated by another US value star, David Dreman. Our criteria are as follows:

■ A return on equity of more than 10 per cent.

■ A current ratio (current assets/current liabilities) of more than 1.

■ Net debt of less than two times cash profits.

■ Five-year compound average annual EPS growth of 5 per cent or more.

■ Forecast EPS growth of 5 per cent or more.

■ Five-year compound average annual dividend growth of 5 per cent or more.

■ A yield higher than 2.64 per cent, which is the average of all stocks screened excluding non-dividend payers.

■ Dividend cover of two times or more.

 

 

In order to carry out this screen all prices and reporting currencies were converted to sterling. In our tables, share prices have been given in local currencies at the time the tables were compiled, which may cause some discrepancies but hopefully only minor ones. Only 7 out of the 1,200 companies qualified as "value" plays and also met our other screening criteria. We take a closer look the stocks below ordered by discount to intrinsic value:

 

Statoil

Statoil, the oil giant majority owned by the Norwegian government, expects output to drop next year as it cuts back shale gas production in the US in response to falling gas prices and following a swap of some of its mature fields for younger but currently less-productive ones. But longer-term prospects look encouraging thanks to the company's track record of exploration success and its move into new regions such as Brazil. The company has a target of increasing production by 2-3 per cent a year between 2012 and 2013. Proving there are more than two ways (Graham and Neff) to slice a value play, broker Investec has a NoK163 sum-of-the-parts based target price on the stock.

TIDMMarket capPrice
OB:STLNoK443bnNoK142

LT EPS growth rate5yr EPS CAGR5yr dividend CAGR
4.4%11%11%

Forecast PEDividend yieldPE/TERDiscount to intrinsic value
8.64.7%0.9483%

Source: S&P CapitaIQ and Bloomberg. CAGR = compound annual growth rate.

 

 

Compagnie Generale DES Etablissements Michelin

Tire-maker Michelin also cropped up in our recent European value stock screen which employed fewer but tougher screening criteria based purely on a Neff approach. While the company is exposed to the troubled motoring market, it is considered a relatively defensive play. Much of its demand is determined by vehicle maintenance rather than the purchase of new vehicles. What's more, it has relatively limited exposure to Western Europe (less than two-fifths of the business). The company also has low levels of debt. There are growth prospects, too. Michelin is investing in increased production to sell into emerging markets and is focusing on high-end tires where it can make higher margins and pass on raw material price increases more easily.

TIDMMarket capPrice
ENXTPA:ML€12bn€67.40

LT EPS growth rate5yr EPS CAGR5yr dividend CAGR
14%13%7.7%

Forecast PEDividend yieldPE/TERDiscount to intrinsic value
7.43.3%0.4479%

 

CA Technologies

CA Technologies has been taking a battering as companies respond to the uncertain economic environment by shelving spending on the enterprise software it supplies, installs and maintains. Internal change at the group - a salesforce revamp and new CEO - is also a consideration for investors. The company only just makes it through our screen having revised down its full-year earnings targets following last month's second-quarter results. There are hopes that bookings will trough this year, though, and cash flows and the dividend are very attractive.

TIDMMarket capPrice
NasdaqGS:CA$10bn$22.51

LT EPS growth rate5yr EPS CAGR5yr dividend CAGR
10%29%38%

Forecast PEDividend yieldPE/TERDiscount to intrinsic value
9.23.5%0.6867%

 

Amec

Shares in oil services group Amec have come off recently as investors have fretted about the potential impact of a global slowdown. The company is also seeing less shale gas activity. But business in the Gulf of Mexico has been strong recently, helped by Amec's limited presence in the region at the time of the BP spill, and there is also strong demand coming from Brazil. At a recent investor day the company reiterated its guidance of double-digit earnings growth this year and next and also suggested it did not need to carry so much cash, which presents the possibility of strong dividend growth and further buybacks. Broker Investec points out that the earnings valuation is currently in line with the peer group despite the high yield and growth potential.

TIDMMarket capPrice
LSE:AMEC£3.2bn1,034p

LT EPS growth rate5yr EPS CAGR5yr dividend CAGR
13%47%21%

Forecast PEDividend yieldPE/TERDiscount to intrinsic value
123.1%0.7458%

 

Koninklijke Ahold

Dutch supermarket giant Ahold is currently valued at a 29 per cent discount to its peer group based on this year's earnings forecasts according to broker Hammer Partners. This is despite strong positions in its home market of the Netherlands and in the US, where signs of a recovery are starting to come through. The company is also attempting to boost sales through new channels, such as online shopping and smaller convenience-style stores and is in the process of bolstering its balance sheet by divesting from a joint venture in Sweden, Norway and the Baltic states.

TIDMMarket capPrice
ENXTAM:AH€10bn€9.82

LT EPS growth rate5yr EPS CAGR5yr dividend CAGR
7.6%10%-

Forecast PEDividend yieldPE/TERDiscount to intrinsic value
9.34.0%0.8056%

 

British Sky Broadcasting

Despite fears about the competitive threats faced by Sky, the company once again announced a strong set of numbers when it reported its first-quarter results last week. BSkyB is making progress by bundling together services such as telephone and internet along with its subscription-TV packages. Strong cash generation is also being used to fund EPS-enhancing share buybacks. Following the recent set of robust numbers broker Investec changed its stance on the shares to a buy, questioning the logic of valuing the shares as if the group was a mature US cable company. The broker's peer-group valuation multiple gives a 850p target price for the shares.

TIDMMarket capPrice
LSE:BSY£12bn716p

LT EPS Growth Rate5yr EPS CAGR5yr dividend CAGR
11%13%10%

Forecast PEDividend yieldPE/TERDiscount to intrinsic value
133.5%0.8956%

 

Prudential

A common way to value life assurance companies is to compare their share prices with their embedded value per share. On this measure, Prudential can hardly be regarded as cheap compared with its peer group. But what our screen picks up on is the strong growth the company has been generating. While the mature UK market is relatively unexciting, this now accounts for only about one-fifth of profits. The US is providing far better prospects as baby boomers squirrel away funds as retirement approaches and business in Asia is thriving.

TIDMMarket capPrice
LSE:PRU£21bn835p

LT EPS growth rate5yr EPS CAGR5yr dividend CAGR
9.5%11%8.0%

Forecast PEDividend yieldPE/TERDiscount to intrinsic value
123.1%0.9451%