Financial news

4 Picks For Uncertain Times

By  | 

Via SeekingAlpha.com

There are buying opportunities that careful investors can leverage into current income and future gains. Social distancing rules and stay-at-home orders have brought the US economy to a standstill, as reflected in a near-collapse of the US economy. Eventually, people and their governmental leaders will believe the danger has passed, and efforts will be made (and have been made) to help get the economy running again.

Meanwhile, many stocks have great long-term resilience and good prospects for recovery and a return to normal pricing. Four are highlighted in this article: Ford (F), Wells Fargo (WFC), AbbVie (ABBV), and Valero (VLO). Of these, three are seriously depressed compared to their December 31, 2019 prices, and one is down with the down market but less than ten percent:

12/31/19 price

Recent price

Percent change

ABBV

88.00

83.13

(5.5)

F

9.30

5.32

(42.8)

VLO

95.65

58.33

(39.0)

WFC

54.00

29.09

(46.1)

AbbVie

AbbVie is a large pharmaceutical that was a spin-off from Abbott Laboratories at the beginning of 2013. At the spin-off, the stock began trading at about $35 per share, so it has increased by 250% or so in the seven years since. ABBV has paid a dividend every quarter, beginning at $1.60 per share annual rate, increasing to $4.72 indicated annual rate through April 15, 2020. Annual dividend growth rate has been about 17%. This firm continues to post significant profitability. Return on sales for 2019 was about 23.7%, and return on invested capital was about 11.5%. ABBV does not have a product directed specifically at the novel coronavirus, or the COVID-19 infection, but it is testing the efficacy and safety of Kaletra/Aluvia (lopinavir/ritonavir), its approved antiretroviral agent used for HIV-1.

Based on annual high and low stock prices, ABBV’s average high P/E ratio is usually around 24 times earnings, and the low average P/E ratio is around 16 or 17 times earnings. Given ABBV’s current guidance for 2020 of about $7.76 GAAP EPS, a return to stock market sanity should produce a 2020 price range for the stock between $124 and $186 per share.

Ford

Ford Motor Company, through the end of 2019, reported sales of about $155 billion and net income of about $47 million. The $47 million in net income was a dismal showing compared to the $3.8 billion reported for 2018 or the $7.7 billion net income reported for 2017. For the first quarter of 2020, sales were off about 20%, and Ford expected to report a loss of about $600 million pre-tax. In March, the dividend and buyback program were both suspended. By April 13, as an ironic result of the Chinese novel coronavirus, all vehicle manufacturing plants, other than those in joint ventures in China, were closed. Were auto sales for April and May simply to disappear, Ford could lose $20 or $25 billion in revenue, with losses not far from those figures.

READ ALSO  UK retail sales dive 18% in May as lockdown bites

There are several reasons to believe Ford will survive. First, it appears that the company’s sound management, as they were in 2008, was prepared for a disaster, although they could not have known the nature or severity of the present mess. On April 9, the company had about $30 billion in cash and had not exhausted its borrowing capacity. Presumably, most borrowers continue to pay their car notes, which means Ford should be able to collect the bulk of the current portion of credit finance receivables, which stood at about $54 billion at year-end 2019. By the company’s own reckoning, it has the cash needed to get through the end of the third quarter, even in the event production has not resumed beforehand. Second, Ford appears to be in the community of firms that are considered “too big to fail” by the US government. Doubtless it would not be in happy circumstances, but a bailout of some type, if needed, seems more likely than not. Third, failing to receive or eschewing governmental bailout, the potential for a private deal, perhaps along the lines of the Buffett/GE deal of 2008, also seems more likely available than not, should such be needed.

Ford trades today at about $4.87 per share. With its loss, the P/E ratio has no meaning. In recent good times, i.e., 2015, 2016, and 2017, the company’s average P/E ratio ranged between 9.1 and 7.9 times earnings. In those three years, return on sales averaged about 4.3% and diluted EPS averaged about $1.60. When Ford returns to normalcy with sales of about $150 billion and an average return on sales of about 4.3%, EPS should return to about $1.60. Given the company’s average P/E ratios, the stock should return to trading in a range between $12 and $15 per share. At less than $5, Ford is a buy.

Valero Energy Corporation

Valero is a refiner and distiller that normally operates 15 oil refineries and 14 ethanol distilleries. In normal times, it refines about 1.1 billion barrels of oil per year and produces about 6.2 billion gallons of refined fuel, mainly gasoline and kerosene.

The company conducts detailed variance analyses tracking the differentials between prices for the various retail and wholesale products and the costs of raw feedstocks as influenced by refining throughput volumes, costs of biofuel credits, distillate margins, and prices for feedstocks other than crude oil, i.e., natural gas and condensates. As a result of squabbles between Russia and Saudi Arabia, worldwide crude prices dropped dramatically – 20% for WTI and 30% for Brent crude – in the first week of March, bringing prices to the high $20s per barrel from the mid $40s. This was followed almost immediately by drops in demand for gasoline and jet fuel, driven by the stay-at-home government policies in response to the coronavirus and the corresponding cancellation of many domestic and international airline flights, taking crude prices to the current levels around $16 or $17 per barrel for WTI and around $21 for Brent crude.

READ ALSO  IDT Corporation (IDT) CEO Samuel Jonas on Q3 2020 Results - Earnings Call Transcript

The reduced prices for raw feedstock are favorable for VLO. Unfortunately, the drop in demand for finished petroleum products has driven the retail prices for gasoline from around $2.72 per gallon (regular US average) to today’s $1.77, a drop of nearly 35%. Note that the company’s sales are wholesale, so the spread between crude prices and retail gasoline prices may be greater than it experiences. VLO has not yet furloughed any of its 10,000 employees, but with all 11 distillate plants closed and both prices and demand for gasoline near historic lows, that may come. According to the San Antonio Express-News, VLO expects to post a 1Q20 loss of as much as $2.1 billion, compared to its $2.4 billion profit for 2019.

In normal times, VLO trades with a high average P/E of about 13.4 times earnings and a low average P/E of about 9.1 times. When the company returns to profitability, even at its average EPS over the last five years of $7 per share, the stock should trade in a range between $64 and $94 per share. VLO is at about $58 today.

Wells Fargo & Company

Wells Fargo is currently operating under restrictions imposed by consent orders with the Federal Reserve Board, the Consumer Financial Protection Bureau, the Comptroller of the Currency, and the Los Angeles City Attorney regarding various unfair and/or illegal practices in consumer finance, company compliance management, operational risk management, and other related matters. Among other things, the company has agreed to pay $1.0 billion in civil penalties and remains under orders to improve the Board of Directors governance and oversight practices. Until the improvements are reviewed and approved by a designated third party, the total assets of the company are limited to the level of December 31, 2017, about $1.92 trillion.

By freezing the total assets of Wells Fargo, the Federal Reserve has effectively stopped the company from growing revenue and earnings. Accordingly, measures such as total revenue, interest income, net interest margin, and return on assets are down in 2019 compared to the prior year.

WFC currently trades at about 7.0 times earnings (2019 EPS of $4.05), about $29 per share. A year ago, under the restrictions outlined above, WFC was trading at about 14 times earnings, putting the stock at about $52 per share. At the end of 2019, it was trading at $54 per share. Since the first of the year, WFC has given up about 46% of its value, with $20 of that drop occurring in the month from February 20 through March 20. In other words, in spite of the restrictions placed on the company by various banking and lending governmental regulators, prior to the danger of the virus being well-known, the stock was behaving reasonably well, trading at 14 times earnings.

READ ALSO  The May unemployment rate is expected to be near 20% as millions more lost jobs

Like many other large banks, WFC is probably in the “too big to fail” category. The Fed has reduced the rediscount rate (primary credit) to ¼ percent and has eased borrowing conditions to encourage more active use of discount window borrowing by banks needing to meet unexpected funding needs. Near the end of March, the Federal Open Market Committee directed the trading desk to buy Treasury securities and agency mortgage-backed securities at the rate of about $125 billion per day to support the smooth function of the Treasury, agency MBS and agency CMBS markets. In other words, quantitative easing to support the monetary system, and consequently the banking system, has returned.

When WFC gets clear of its current regulatory restrictions and returns to its normal profitability and growth, it does not seem unreasonable for EPS to return at least to the average of the last five years before the virus, or about $4.11 per share. At that time, one could also expect the price-to-earnings ratio to return to its range of 14.3 times on the high side and 11.4 times on the low side, based on average high and low prices over the years from 2015 through 2019. This should produce a trading range for WFC from about $47 to about $59 per share, making the stock a buy at $29 and vicinity.

Conclusion.

All of the firms reviewed here have problems, and all have seen outsized effects of virus-related securities repricing. As we come clear of the virus and get the economy back on track, each of Ford, Valero, and Wells Fargo could produce near-100% gains. AbbVie should benefit from the rush for virus and flu-related treatments, cures, and preventatives, and should continue to post remarkable growth and profits, and the stock price should reflect the recovery and enthusiasm.

Disclosure: I am/we are long VLO, F, WFC, ABBV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.




Print Friendly, PDF & Email

Latest from finanz.dk