Stocks with price-to-earnings ratios in the single digits are rare at the moment, but not extinct. Among the large American companies that populate the S&P 500 index, around one in 20 is priced at less than 10 times both trailing and forecast earnings.
P/E ratios are calculated by dividing a company’s stock price by a year’s worth of its earnings per share. A $15-per-share company that earns $1 a share in a year has a P/E of 15. That’s about the historic average price for U.S. stocks — 15 times trailing earnings. Investors who wish to hold stocks but worry about another steep market decline or a downturn in the economy should consider swapping high-P/E shares for low ones. The latter tend to fall less when the market and economy disappoint, because their shares are already priced for meager growth.
I recently screened the 500 index for trailing P/Es in the single digits and found just over 50 of them. I wanted to eliminate companies whose earnings are expected to plunge, leaving their P/Es looking higher than before, so I winnowed my list to just those companies that also sell for less than 10 times forecast earnings for both their current fiscal year and the following one. That left fewer than 25 names. A low P/E can sometimes be a sign of distress, so in selecting the three companies below I avoided heavily indebted ones that are consuming rather than generating cash.
Dean Foods
P/E (current fiscal year EPS): 9.6
Dean Foods (DF) has a stock market value of less than $1.9 billion, making it one-tenth the size of the average S&P 500 company. That seems a low price for a company that’s the largest player by far in the U.S. fresh milk trade, with yearly sales of more than $11 billion. The trouble is, although a small portion of Dean’s sales comes from branded organic milk, soy milk and butter, most of its sales come from commodity milk, which gives retailers plenty of say on prices. Grocers have been cutting prices on highly visible items like milk of late to lure shoppers, and Dean’s margins have suffered. Wall Street expects the company’s adjusted earnings per share to fall from $1.59 last year to $1.06 this year, before recovering to $1.23 next year. Management says it expects margins to bottom this year, so patient investors might find the stock a bargain at today’s price, even though Dean doesn’t pay a dividend. The company owes plenty but also generates free cash and has reduced debt in recent years.
Computer Sciences
P/E: 9.8
Computer Sciences (CSC) provides information technology and services to businesses and government agencies. It can help companies shift their programs to centralized “clouds,” track cost-cutting efforts, outsource work and protect data, among other things. Industry growth is slow at the moment, but Computer Sciences has plenty of exposure to defense and security customers, who are expected to make larger investments in information technology in coming years, and the company has deep experience digitizing patient records for the U.K.’s health-care system, putting it in a good position to win business if the U.S. makes a similar push. On Thursday, Computer Sciences is expected to report financial results for its fiscal fourth quarter. Earnings per share are estimated to have increased 24% for the year. Early forecasts for the company’s recently started fiscal year call for earnings growth of 3%.
Eli Lilly
P/E: 7.4
There’s much for stock investors to dislike about Eli Lilly (LLY). Like most big drug makers at the moment, it faces likely sales declines from looming patent expirations, and its pipeline of drugs in development isn’t considered especially robust. That raises the possibility that the company will pursue acquisitions, but its rivals have already been buying, and the most attractive takeover candidates have presumably already been snatched up. Recently passed changes to America’s health-care laws look likely to crimp Lilly’s profits in the near term. And finally, the company has given shareholders little reason to cheer over the past decade. Its shares sell for less than half their May 2000 price. All that said, the stock is now less than half as expensive as the broad market based on earnings, and it carries a whopping 5.8% dividend yield — so long as management doesn’t cancel payments to afford an acquisition. As an analyst at investment bank Jefferies put it upon venturing a “buy” recommendation of the stock earlier this year, the discount reflects the past and not the future, and a little bit of news from Lilly would likely go a long way for the stock.
Jack Hough is an associate editor at SmartMoney.com and author of “Your Next Great Stock.”
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