3 Price-to-Book Gems

11/28/2011 7:30 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Quality companies with low price to book value ratios have outperformed companies with higher valuations for the past three-, five- and ten-year periods, says J. Royden Ward of the Cabot Benjamin Graham Value Letter.

To find the best companies with low P/BV ratios, we required:

  • Value Line Financial Strength ratings of B++ or better
  • low price to earnings ratios
  • dividend yields of 1% or higher
  • good earnings prospects for the next 12-month and five-year periods.

Abbott Laboratories (ABT)
This is a terrific company selling at a reasonable price and yielding an above-average dividend.

Abbott is performing quite well with the help of strong sales in emerging markets and with recent acquisitions. Sales will increase 6% and earnings will likely increase 10% during the next 12 months.

ABT’s forward 12-month P/E of 10.7 is quite reasonable. Earnings will continue to increase at a 10% pace in future years, and the dividend yield is now 3.6%.

Drug stocks, in general, have lagged the stock market in 2011, but lately investors are beginning to notice the low P/Es, high yields, and steady earnings growth.

There is good news at Abbott, too. The company will split into two separate companies before the end of 2012. We believe the two companies will be worth more than the current company, and investors who wait will be justly rewarded!

ABT is very low risk. Our minimum sell price for the stock is $72.97.

CME Group (CME)
After several mergers and acquisitions, CME is now the world’s largest futures exchange, and is capable of trading and clearing a wide variety of futures and options.

CME has produced rapid growth during the past eight years, which will probably continue in the future. EPS growth of 12% is likely during the next 12-month period.

We foresee very little change in speculative futures trading, even though Congress has enacted restrictive regulation. The company is focused on increasing transparency and upgrading technology.

Elevated market volatility because of the sovereign debt crisis in Europe is sparking substantially higher options volume to the benefit of CME. We expect the high demand for options to continue well into 2012.

At 14.1 times forward 12-month EPS and 0.77 times book value, CME shares are very reasonable. Also, the dividend—which will likely be raised soon—provides a respectable 2.1% yield.

CME is low risk. Our minimum sell price is $480.

Occidental Petroleum (OXY)
This is one of the largest oil and gas companies in the US, but also has international exploration and production operations. OxyChem, a subsidiary, is one of the largest US marketers of chlorine and caustic soda.

Occidental sold several of its businesses and acquired others, so it can focus on oil and natural-gas exploration and production. Recent results have been impressive, with revenues rising 24% and earnings jumping 47% during the past 12 months.

We forecast sales growth of 12% and an EPS increase of 14% based upon continuing high oil prices during the next 12 months. The company has huge oil and gas reserves, which it will aggressively develop during the next several years.

OXY is low risk. Our minimum sell price is $142.

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