The price-earnings (P/E) ratio is one of the most significant measurements of a stock. The P/E ratio tells investors how much an investor is willing to pay for every dollar of a company’s earnings. P/E ratios are typically listed along with a company’s stock price. However, if a company’s P/E ratio is not readily available it is easy to determine. The formula for calculating a stock’s P/E ratio is the price of a share divided by the company’s earnings per share (EPS). A stock with a share price of $40 and that has earned $8 per share over the past 12 months has a P/E ratio of 20. The P/E ratio is significant because it can give investors a clue as to whether a stock is properly valued.
However, knowing a stock’s P/E ratio is only a starting point. Any individual P/E ratio has to be compared to P/E ratios of companies in their sector, or with a similar market cap and perhaps as compared to a market index relative to the stock’s category. During this lengthy bull market, “average” P/E ratios have risen which is making a stock with a low P/E ratio stand out more. But is this bad?
In some cases, a low P/E ratio can indicate that investors are concerned about underlying problems that are affecting the growth potential of the stock. However, companies may have a low P/E ratio because they are in a stable, mature industry with moderate growth potential. Also, stocks that pay a high dividend yield may have a lower P/E ratio because they are returning more of their profit to shareholders. If either of these is the case, then low P/E stocks can be a profitable investment because they generally have a lower price per share and a low ratio means that it will take less time for an investor to recoup their investment. For example, a stock with a P/E ratio of 5 will allow an investor to earn back their investment in five years.
In this presentation, we’ll review the stock of eight companies who have comparatively low P/E ratios but still offer an investor room to make a nice profit.
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- AT&T
- Verizon
- Seagate Technology
- Goodyear Tire & Rubber Co
- Dollar Tree Inc.
- General Motors
- Eastman Chemical Company
- Sony
#1 - AT&T (NYSE:T)
AT&T (NYSE: T) - AT&T has a P/E ratio of 10.70 (stock price of $30.51 and EPS of 2.85). One of the most attractive benefits of owning AT&T stock is its dividend yield that currently is over 5 percent. AT&T is also part of the exclusive Dividend Aristocrat club having raised its dividend for 30 consecutive years. The telecommunications giant has a market cap of over $220 billion which has put it in position to take on the challenge that came as more customers “cut the cord” right as the company had merged with satellite provider DirecTV. With their 2018 acquisition of Time Warner, the company now has access to nearly 200 million subscribers on both mobile and video platforms, an important selling point the company can make to advertisers, which will be necessary to hedge against the rising cost of creating new content. And even with low-cost competition in the mobile space, AT&T is still increasing its subscriber base and remains one of the top brands across its products and services.
About AT&T
AT&T Inc provides telecommunications and technology services worldwide. The company operates through two segments, Communications and Latin America. The Communications segment offers wireless voice and data communications services; and sells handsets, wireless data cards, wireless computing devices, carrying cases/protective covers, and wireless chargers through its own company-owned stores, agents, and third-party retail stores.
Read More - Current Price
- $22.75
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 14 Buy Ratings, 7 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $25.53 (12.2% Upside)
#2 - Verizon (NYSE:VZ)
Verizon (NYSE: VZ) - Verizon is another quality telecom play. It has a P/E ratio of 15.29, but it also offers an attractive dividend yield of 4.19%. The key for Verizon is the emergence of 5G technology. For Verizon, this can’t come too soon. The technology – which can bring nearly fiber-optic speed into the home market – has been promised for years, and is finally making appearances in large markets. The expansion of 5G over the next five years will allow Verizon’s core mobile business to take the next leap forward, and should come with higher prices and margins which have taken a hit as competing 4G networks have encroached on Verizon’s supremacy. However, what should be more enticing to investors is that the first 5G product that Verizon is introducing is an in-home router, called 5G Home. This wireless product will facilitate the customer’s desire to cut the cords while allowing Verizon to reach an audience they have never been successful at reaching before. And investors should keep their eye out for new innovations in the connected device space where Verizon should have a prime seat at the table.
About Verizon Communications
Verizon Communications Inc, through its subsidiaries, engages in the provision of communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide. It operates in two segments, Verizon Consumer Group (Consumer) and Verizon Business Group (Business).
Read More - Current Price
- $39.93
- Consensus Rating
- Hold
- Ratings Breakdown
- 8 Buy Ratings, 10 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $46.51 (16.5% Upside)
#3 - Seagate Technology (NASDAQ:STX)
Seagate Technology (NASDAQ: STX) - Seagate has a P/E ratio of 8.08 with an impressive 5.43% dividend yield that is backed by a strong free cash flow of nearly $1.5 billion that will be more than enough to make that dividend sustainable (the dividend currently requires just under $550 million to pay at current levels). But the stocks on this list are supposed to be primed for growth, and despite some softness in its core hard disk drive business, the company managed to take cost-cutting measures that turned a 4% revenue decline in 2017 into an 82% increase in earnings per share. Looking ahead to 2019, high-capacity drives are still seeing strong demand and STX looks to capture 50% market share of the 10TB and 12TB markets by the end of the year. The company is also successfully shifting investment into other areas such as cloud storage. Their 2015 acquisition of Dot Hill Systems is starting to pay off.
About Seagate Technology
Seagate Technology Holdings plc provides data storage technology and solutions in Singapore, the United States, the Netherlands, and internationally. It provides mass capacity storage products, including enterprise nearline hard disk drives (HDDs), enterprise nearline solid state drives (SSDs), enterprise nearline systems, video and image HDDs, and network-attached storage drives.
Read More - Current Price
- $87.31
- Consensus Rating
- Hold
- Ratings Breakdown
- 11 Buy Ratings, 6 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $118.83 (36.1% Upside)
#4 - Goodyear Tire & Rubber Co (NASDAQ:GT)
Goodyear Tire & Rubber Co (NASDAQ: GT) - In September of 2016, GT’s stock was trading at a P/E ratio of around 24 with a price of over $30. The stock has been cut almost in half in two years, but the P/E ratio has dropped even more, down to just over 6, suggesting that the stock may be oversold. Goodyear has a recent history of delivering consistent profit growth, but that growth has been under pressure from rising commodity prices over the past two years. Between 2016 and 2019, oil prices grew dramatically rising from below $50 a barrel to over $80 a barrel. Since approximately two-thirds of the company’s raw material costs are impacted by the price of oil, the surge in prices derailed the company’s plans for a $1 million growth in segment operating income (SOI) by 2020 that they announced at the end of 2016. Adding to their cost pressures was the fact that oil was not the only commodity to see a significant rise in prices. Steel costs also rose during this period. Fortunately, the company is starting to see relief from these rising prices and, for investors, the other piece of good news is that GT is not just relying on lower material costs to fuel their growth. They instituted a price increase in September 2018 that should improve their profitability even if commodity costs remain flat.
About Goodyear Tire & Rubber
The Goodyear Tire & Rubber Company, together with its subsidiaries, develops, manufactures, distributes, and sells tires and related products and services worldwide. It offers various lines of rubber tires for automobiles, trucks, buses, aircraft, motorcycles, earthmoving and mining equipment, farm implements, industrial equipment, and other applications under the Goodyear, Cooper, Dunlop, Kelly, Mastercraft, Roadmaster, Debica, Sava, Fulda, Mickey Thompson, Avon, and Remington brands and various house brands, as well as under the private-label brands.
Read More - Current Price
- $8.62
- Consensus Rating
- Hold
- Ratings Breakdown
- 1 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $13.30 (54.3% Upside)
#5 - Dollar Tree Inc. (NASDAQ:DLTR)
Dollar Tree Inc. (NASDAQ: DLTR) - Dollar Tree is trading at slight discount to the industry average. The P/E ratio for DLTR sits at 18.22 while the Discount Store Industry has a P/E ratio of 19.86. What’s more encouraging for investors is that the stock is up 18.5% in the last six months while the industry is down 2.7%. Analysts are also projecting the company’s long-term earnings growth rate to come in at 9.8%. The driver behind this growth is the renovations happening at its sister brand, Dollar General. These renovations which began in 2018 are starting to pay off for the stock. Traffic is up as are comparable store sales (comps) growth of 10% over control stores. The company remodeled 522 Dollar General stores much higher than its initial target of 450 stores and it re-bannered 200 more stores to the Dollar Tree name. The renovation and re-bannering activity is expected to continue throughout 2019 and will include some store closings. As a result of these efforts, the company is expecting to see comps growth of up to 1.5% by the end of fiscal year 2019.
About Dollar Tree
Dollar Tree, Inc operates retail discount stores. The company operates in two segments, Dollar Tree and Family Dollar. The Dollar Tree segment offers merchandise at the fixed price of $ 1.25. It provides consumable merchandise, which includes everyday consumables, such as household paper and chemicals, food, candy, health, personal care products, and frozen and refrigerated food; variety merchandise comprising toys, durable housewares, gifts, stationery, party goods, greeting cards, softlines, arts and crafts supplies, and other items; and seasonal goods that include Christmas, Easter, Halloween, and Valentine's Day merchandise.
Read More - Current Price
- $72.94
- Consensus Rating
- Hold
- Ratings Breakdown
- 5 Buy Ratings, 16 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $85.58 (17.3% Upside)
#6 - General Motors (NYSE:GM)
General Motors (NYSE: GM) - Many automakers are trading at low multiples, making the current situation for General Motors very appealing. Not only is the automaker trading at a P/E ratio below many of its peers (6.72), it is one of the best performing industry stocks for YTD 2019 and, with a market cap that has risen to $54 billion, GM is the largest automobile manufacturer in the United States. The recent stock price surge comes after a better than expected fourth-quarter earnings report that included improved forward guidance for 2019 that included cost-cutting initiatives such as plant closures and layoffs. The company also recently implemented a share buyback program while also issuing a dividend with a 3.7% yield. Investors are also optimistic about the company’s recent partnership with Amazon to invest $700 million in the electronic truck manufacturer, Rivian. Although GM faces challenges in the electric vehicle (EV) category, they remain one of the pioneers of this space and sold over 40K electric cars in 2018, which was down from around 49K in 2017.
About General Motors
General Motors Company designs, builds, and sells trucks, crossovers, cars, and automobile parts; and provide software-enabled services and subscriptions worldwide. The company operates through GM North America, GM International, Cruise, and GM Financial segments. It markets its vehicles primarily under the Buick, Cadillac, Chevrolet, GMC, Baojun, and Wuling brand names.
Read More - Current Price
- $51.81
- Consensus Rating
- Hold
- Ratings Breakdown
- 10 Buy Ratings, 9 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $58.70 (13.3% Upside)
#7 - Eastman Chemical Company (NYSE:EMN)
Eastman Chemical Company (NYSE: EMN) - Eastman Chemical Company is a player in the Chemicals sector that has some significant indicators working in its favor. To begin with, the company is showing an uptick in average trading volume and stock price volatility. Adding to this the stock has a P/E ratio of 10.48 which is in stark contrast to the industry ratio of 26.18. Although showing a slight miss on both the top and bottom lines in its most recent earnings report, EMN reported a return on equity of 20.15% and a net margin of 10.64%. After its last earnings period, EMN received a buy rating from 60% of analysts with none issuing a Sell rating. The company is heavily traded by hedge funds and other institutional investors. Eastman announced a quarterly dividend that will be issued on Friday, April 5th. The $0.62 dividend puts the company’s current dividend yield of 3.17%.
About Eastman Chemical
Eastman Chemical Company operates as a specialty materials company in the United States, China, and internationally. The company's Additives & Functional Products segment offers amine derivative-based building blocks, intermediates for surfactants, metam-based soil fumigants, and organic acid-based solutions; specialty coalescent and solvents, paint additives, and specialty polymers; and heat transfer and aviation fluids.
Read More - Current Price
- $91.76
- Consensus Rating
- Hold
- Ratings Breakdown
- 6 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $113.92 (24.2% Upside)
#8 - Sony (NYSE:SNE)
Sony (NYSE: SNE) - Gaming is a tough industry, and Sony has experienced its share of ups and downs with its PlayStation console. And if that were what the company had to rely on, things may look pretty bleak. However, who would have thought that the innovation that may be getting investors really excited is … a smartphone? Although not reaching mainstream status yet, the company’s Xperia smartphone is starting to gain traction. Among tech enthusiasts, the phone offers some impressive technical specifications that make it among the most powerful smartphones available. Add to that, the current trade dispute between the United States, China and Japan is unlikely to hurt sales of the Xperia in the same way Apple is seeing plummeting sales of the iPhone in those markets. Another innovation that is gaining traction is the mirrored camera which is catching on among photography consumers and Sony is dominating the space with plans to release its flagship Sony A7000 camera in the near future. The company has a P/E ratio of 7.73.
About Sony
Sony Corporation designs, develops, produces, and sells electronic equipment, instruments, and devices for the consumer, professional, and industrial markets worldwide. The company distributes software titles and add-on content through digital networks by Sony Interactive Entertainment; network services related to game, video, and music content; and home and portable game consoles, packaged software, and peripheral devices.
Read More - Current Price
- $21.02
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
A company’s price-to-earnings ratio is a valuation rating that at times serves as a significant indicator of future stock performance. However, there are many factors that can contribute to a company’s price-to-earnings ratio including their willingness and history of paying dividends, the overall sales trend, where they are in their product development cycle and any changes in their management or business strategy. Stocks that have a low P/E ratio frequently can be purchased at a discount to other stocks and, for this reason, may offer value to investors. However, investors as part of their analysis of a stock, a company should compare the P/E ratio of one stock with another within its industry or one with similar market capitalization. Not all industries perform the same even in bull and bear markets, so what would be considered a low P/E ratio at one point may be considered average in another.
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