October 21, 2008
Value in Blue Chip Stocks
CollegeAnalysts has an article today where they look at some of the more compelling values in some of the blue chip stocks. From the article:
Johnson & Johnson (JNJ) is one of the few stocks that I’ve consistently liked. The stock trades for 12x operating cash flow and a historically depressed Price-to-Sales multiple. In a market with reasonable multiples, I think JNJ goes for 3.5x sales and therefore is worth upwards of $85/share – giving investors a nice 25% off sale. The countercyclical business mix should help as well, and the company just reported solid results with 6.4% sales growth and a better than 10% increase in EPS. Something minorly more sensitive to spending patterns like 3M (MMM) is trading for 1.5x sales right now, when the normal multiple converges at or above 3.0x… so while this might imply MMM is a $100 stock, it doesn’t have to be for you to realize good returns. In addition, the 9x operating cash flow multiple shows that there’s plenty of profitability behind those sales. Coca-Cola (KO) is one of the world’s best brands, and it too is being thrown away despite the fairly high confidence most people should have in the continued consumption of the company’s beverages. I think KO should go for at least 4x sales, making this a $60+ stock. Disney (DIS) is trading at similar P/S and Price-to-Book multiples as the stock was at in 2002 – even though cash flow has improved to more than $4 billion in FCF annually. Historical multiples imply DIS is a $40 stock, making this one of the better sales at 35% off.