During the last bear market (2000-2002) there were dozens of situations where individual stock valuations looked down right silly. This bear market will be no different, and long term value-oriented investors can take advantage of the fact that in times like these numerous bargains can be had, but most people are too afraid to take them.
A great way to find value in the market is to use enterprise values (market values after netting out the firm’s cash on hand and debt outstanding). Investing in companies with hoards of cash in the bank allow investors to get the operating businesses on the cheap. There are many examples of this, and I often talk about net cash positions of various stocks on this blog, but let’s use former Halliburton (HAL) subsidiary KBR (KBR) to show what I am talking about. I don’t own the shares, but it fits the description perfectly.
At $15 per share, KBR stock is down 66% from its 52-week high of $44 and sports a market value of about $2.55 billion. Earnings in 2007 were $1.08 per share, and are expected to jump to $1.72 this year and $1.98 in 2009. That quick glance shows that KBR appears to be a pretty cheap stock at about 10 times trailing earnings and less than 9 times current year projections, but KBR’s balance sheet tells an even better story.
As of June 30th, KBR had cash on hand of $1.85 billion and no debt outstanding. With a market value of only $2.55 billion, KBR’s enterprise value is merely $700 million. With $11 per share of net cash in the bank, investors who buy KBR at $15 per share are getting the firm’s operating businesses for the aforementioned $700 million, or only $4 per share. This for a company that has earned $428 million in operating income in the last 12 months.
A valuation of less than 2 times cash flow is truly silly, but in markets like the one we have right now, nobody really cares because they are too busy being concerned about overnight LIBOR rates and when the Treasury is going to start buying up assets from banks. What great news for long term investors who can seize on opportunities.
Full Disclosure: No positions in the companies mentioned at the time of writing, but positions may change at any time