4 wildly cheap companies are trading near book value

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Investment thesis

The companies below are trading close to book value and at discounted levels to the average PE ratio of their peers. All are showing extraordinary growth fueled either by company-specific dynamics or industry trends.

I don’t think these companies will stay on the cheap for long. For example, shares of Jackson Financials (JXN) are up 28% in the past three months, compared to a 2.5% decline in the industry average. Just like Zim Integrated Shipping (ZIM) and Sibanye Stillwater (SBSW).

The reason these companies are trading at a discount varies, as shown below. I believe all companies want to stay independent instead of being picked up in an M&A deal, which I believe would be lucrative for the acquirer. This is evident by the takeover defenses put in place to protect against such transactions. This means they rely on the public to fairly assess their actions, which I don’t believe has happened. These value companies represent the market discrepancies and inefficiencies that form the foundation of value investing, pioneered by Benjamin Graham, David Dodd and Warren Buffet.

Zim Integrated Shipping (ZIM)

Zim Integrated Shipping (ZIM) is an Israeli ocean freight company listed on the NYSE. The company operates 113 freighters serving established and niche global routes. It recorded strong revenue growth, fueled by soaring shipping prices, which enabled it to deleverage, build up cash and pay a dividend. Ports are still clearing up backlogs created by the pandemic, and many commentators believe traffic jams aren’t easing anytime soon. In Los Angeles, there are 78 ships in a queue waiting for a berth to unload their cargo. The longer ships wait to dock, the less there are in circulation, reducing supply and driving up shipping prices. ZIM was one of those that benefited from supply chain disruptions.

It operates a small capitalization model that allows it to adjust its operations to demand without incurring costly capital expenditures and without risking overcapacity. ZIM’s capital-light model is ideal because sooner or later congestion will ease and the company will be able to adjust its spending better than other shipping lines investing in additional capacity.

In the third quarter of 2021, ZIM reported revenue of $3.1 billion and net income of $1.5 billion, increasing its equity by 85%, breaking a cycle of stagnant growth in periods previous ones, a fact reflected in our Seeking Alpha Quant Score below. However, if the company continues to generate the same levels of cash flow as in recent quarters, it will trade below its tangible book value in the second half of 2022. This low valuation is also reflected in the Quant Score. below, making ZIM a top value pick this year.

Zim Integrated Shipping chasing an Alpha Quant score

Zim Integrated Shipping Quant Score (Seeking Alpha)

Jackson Financial Inc. (JXN)

JXN is a financial services company specializing in the sale of variable annuities, a contract sold by insurance companies that promises periodic payments in return for a fixed lump sum. This service is very popular with retirees.

What is unique about JXN is its long history of profitability and established back-office operations inherited from industry giant Prudential (PUK), which recently divested the business. Now, one might ask, if JXN is a good company, why would PUK be a part of it? Simply, PUK is going in a different direction, focusing on Asia rather than the United States. Splitting JXN will save money. Plus, it’s good for shareholders, who received shares of JXN ahead of its IPO last September.

Rising interest rates could be detrimental to some JXN assets, particularly fixed income investments. As interest rates rise, these assets will become less attractive and their fair value will decline. However, as these bonds mature, JXN will be able to reinvest in a high-yield environment, which will allow it to receive more cash to fund its annuity payments.

In the first nine months of 2021, the company generated $2.6 billion in net profit from $7.3 billion in revenue, mostly management fees on its assets under management. The company is currently trading below its book value, with a PE ratio of 1.6x compared to the industry average of 11x. The company’s predictable earnings, strong historical performance and low valuation warrant a Buy rating.

Sibanye Stillwater (SBSW)

SBSW is a gold mining company headquartered in South Africa, with global operations in the United States, Canada and South Africa. The company is implementing multiple initiatives to increase shareholder returns, including dividends, share buybacks and capital investments in green metals such as lithium, nickel and cobalt.

Earnings are sensitive to precious metal prices; thus, variability in earnings is inevitable. However, the company has recorded positive cash flow since its IPO in 2012, reflecting management’s success in managing assets and inventory.

SBSW is trading at a mere 3.5x PE TTM ratio despite strong gold prices. This means that if an investor buys the company today, they will only have to wait four years to realize 100% of their investment. To put things into perspective, real estate has a cap rate of 5%, which translates to 20 years for an investor to recover their initial capital.

Description: Sibanye Stillwater Quant Scores

Sibanye Stillwater Quant Scores (In Search of the Alpha)

BlueLinx (BXC)

BXC is a wholesale distributor of building materials, such as lumber, panels, siding and other materials that require large spaces for storage. The company is expected to benefit from several trends, including a strong housing market, high builder confidence and rising material prices, which are boosting the value of the company’s inventory.

The company improves its relationships with its customers through digitalization, increased margins and working capital management. TTM revenues increased by 46%, while EBIT increased by 265% over the last twelve months. The company is currently trading at a forward PE of 3x, well below the industry average of 19.6x.

Description: In search of an Alpha Quant notation

BlueLinx Quant Score (Seeking Alpha)

Summary

The companies above are experiencing extraordinary growth, fueled by industry and company specific dynamics, including supply chain disruptions, inflation and management initiatives to improve profitability. Despite this, they are trading close to book values ​​and significantly below the average price multiples of their peers. However, I do not believe these companies will remain undervalued for long.

Some of the revenue boosting factors are temporary, such as maritime traffic jams and material shortages. Nonetheless, the four companies listed above capitalized on these trends by improving their balance sheets and cash positions while implementing hedging strategies when these dynamics began to fade. For example, ZIM hedges against falling shipping prices by adopting a capita-light model that quickly reduces operating costs once congestion eases. BXC, on the other hand, is minimizing inventory levels in anticipation of falling building material prices.

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