So far, August hasn't started out as a great month for the stock market. Many shareholders who had been enjoying gains earlier in the year have seen many of those gains reverse as rising interest rates continue to provide an ever more compelling alternative to stocks for income-oriented investors.
Yet if there's an upside to a down market, it's that they often offer up value prices on solid businesses. With that in mind, three Motley Fool contributors examined companies that looked like genuine bargains in today's market. They picked Advance Auto Parts (NYSE: AAP), Axos Financial (NYSE: AX), and Albertsons (NYSE: ACI). Read on to find out why and determine for yourself whether they represent the types of value-priced businesses you'd like to own for yourself.
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A company for the long haul
Eric Volkman (Advance Auto Parts): One beaten-down stock that feels like a clear and unambiguous good deal is Advance Auto Parts, whose price is down a queasy 51% so far this year.
Much of Advance's share price retreat was due to the very disappointing first-quarter results it published at the end of May. Year-over-year net sales growth was weak, and net income fell off a cliff while coming in far under the consensus analyst estimate.
Compounding that, the company cut both its full-year guidance for key line items -- sales, earnings, and free cash flow, to name only three critical ones. As if that wasn't painful enough, it also took an ax to its quarterly dividend, slicing it to $0.25 per share from $1.50.
The auto parts business is coming out of a period of struggle, and Advance has suffered lately. The global supply chain woes that were particularly acute last year haven't entirely melted away. On top of that, economic worries in recent times have dampened the auto parts market -- nonessential car repairs and upgrades are often postponed when dark clouds appear on the macroeconomic horizon.
The situation won't magically improve soon for Advance. The company is slated to release second-quarter results on Aug. 23, and the analysts tracking it aren't expecting much. On average, they're projecting net sales will be flat year over year, and per-share net income will decelerate by 57%.
Yet there are many green lights on the road ahead. The world continues to embrace alt-fuel rides -- particularly electric vehicles (EVs), sales of which continue to rise at torrid rates. As they do, drivers holding on to their beloved old gas guzzlers will need to perform more maintenance to keep them in shape. Meanwhile, the economic concerns seem to be easing. Ditto for those knotty supply chain tangles.
Eventually, these shifts will filter down into higher sales and better profitability for Advance. Its prognosticators are already anticipating a recovery in 2024; for that year, they're modeling a slight 2% growth in net sales, and an encouraging per-share earnings improvement of 15%.
With the continuing rise of alt-fuel vehicles -- not to mention those with increasingly sophisticated assisted driving systems -- we can imagine this will be only the start of a solid, long-term recovery story for Advance.
Put it in the (online) bank
Jason Hall(Axos Financial): Moody's recently downgraded 10 banks, put another six under review -- including some of the biggest regional banks -- and shifted the outlook to negative for another 11. As a result, many investors have thrown more than one banking baby out with the bathwater.
That's created a buying opportunity for savvy investors looking for a bargain. Already one of my largest holdings, Axos Financial, tops my list. Like other banks, Axos owns lots and lots of loans. What makes it a little different from most is how much of its book is invested in variable-rate loans. At the end of the second quarter, a massive 59% of its loans are variable rate, while another 34% is hybrid loans.
The result? Net interest income increased 23% last quarter, and 29% over the past year, while net interest margin -- its effective yield earned after it pays depositors and on borrowings -- increased to 4.34% while most banks are seeing compression.
Fear of banks has pushed Axos shares to bargain levels. At recent prices, you can buy shares for barely 8 times earnings, and 1.27 times book value. How cheap is that? The average P/E over the past decade is 14, with an average price-to-book value of 2.2. If its earnings hold up, that implies 70% to 80% upside just on valuation normalizing to the historical average. Thing is, I expect Axos' profits to continue growing over the long term. That makes the stock even more a bargain today.
Heads, you win; tails, you pick up what looks like a bargain
Chuck Saletta (Albertsons): Grocery giant Albertsons has agreed to be bought out for $34.10 per share, less a $6.85 special dividend that Albertsons already paid. The net price of $27.25 for the deal represents a substantial 25% premium to Albertsons' recent stock price of $21.79 per share.
Of course, it is likely that some of the stores will need to be divested as part of the merger to satisfy antitrust regulators. Those divestitures will reduce the price of the acquisition but will also leave behind a spin-off company in the hands of Albertsons' current shareholders. As a result, even if regulators shrink the size of the overall deal, Albertsons' shareholders would remain more or less whole.
Yet the size of the acquisition has added complexities on top of the operational ones associated with folding in a company of Albertsons' size and scope. In particular, it is proving to be a difficult merger to get through legal approval. First, a judge temporarily blocked Albertsons' special dividend, which had delayed its payment. More recently, a handful of states' attorneys general have written the FTC to announce their opposition to the merger.
That opposition is probably a decent reason that Albertson's stock recently traded hands at around a 25% discount to its buyout price. The market views it as a risk that the merger won't be approved at all. Assuming that happens, as a going business, Albertsons currently trades at around 10 times its trailing earnings and eight times its anticipated forward earnings. Not only that, but analysts also expect it to be able to increase those earnings at around 8% annualized over the next five years.
Put it all together, and you wind up with a company with a solid acquisition-related upside if all goes well and what looks like a solid value price compared with its prospects if it doesn't.
Get started now
While there are good reasons to believe Advance Auto Parts, Axos Financial, and Albertsons all look like bargains today, prices that excite value investors rarely last long in the stock market. As a result, today is a great day to investigate them further or to seek out other bargains for yourself. If you do, you just might find yourself face to face with an opportunity to buy a great company at a bargain price.
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Chuck Saletta has no position in any of the stocks mentioned. Eric Volkman has no position in any of the stocks mentioned. Jason Hall has positions in Axos Financial. The Motley Fool has positions in and recommends Axos Financial. The Motley Fool has a disclosure policy.
