Housing Market Swoon Presents Buying Opportunities
Plus lots of other stocks currently mispriced by the market.
Plus lots of other stocks currently mispriced by the market.
Following is a sampling of stocks that recently jumped to 5 stars. By way of background, we award a stock 5 stars when it trades at a suitably large discount--i.e., a margin of safety--to our fair value estimate. Thus, when a stock hits 5-star territory, we consider it an especially compelling value.
To get a complete tally of stocks that have recently jumped to 5 stars--as well as our full list of 5-star stocks--including our consider buying and selling prices, risk ratings, and moat ratings--simply take Morningstar Premium Membership for a test spin. Click here to sign up for a free trial.
Mohawk Industries
Moat: Narrow | Risk: Average | Price/Fair Value Ratio*: 0.76 | Three-Year Expected Annual Return*: 20.3%
What It Does: Mohawk Industries (MHK) manufactures flooring products including carpets, tiles, resilient, hardwood, and laminate. It markets its products under various brands that include Aladdin, Mohawk Home, Bigelow, Karastan, and Custom Weave. Mohawk distributes these goods through a variety of retail and wholesale channels for use in the construction and renovation of homes, offices, hospitals, schools, and government buildings.
What Gives It an Edge: Morningstar analyst John Kearney assigns Mohawk a narrow economic moat. According to Kearney, the firm is the largest flooring manufacturer in the United States, accounting for more than a quarter of the industry's total sales. Aside from Berkshire Hathaway's (BRK.B) Shaw Industries, no other competitor has more than a single-digit percentage share of the floor covering market. By leveraging its base of more than 30,000 vendors and superior distribution capabilities, Mohawk has been able to establish the top market position in every major flooring category.
What the Risks Are: Continued escalation in raw-material costs could pressure margins further as rising floor covering prices often force consumers to trade down to lower-margin products. A decline in consumer confidence or a severe downturn in new housing starts would also have a negative impact on the company's ability to sustain or grow earnings.
What the Market Is Missing: Kearney believes the market is preoccupied with Mohawk's near-term future, clouded by a downturn in the domestic residential construction market, coupled with soaring input costs. However, with adequate liquidity and solid cash-flow generation, Mohawk, in Kearney's opinion, has the ability to weather the current housing slump. While the U.S.-focused carpet and tile businesses are experiencing some revenue and margin compression, Mohawk's recently acquired European laminate flooring business (Unilin) continues to buoy the firm's earnings with its remarkable performance. Kearney anticipates that as we move through the back half of 2007, Mohawk's year-over-year performance should improve as it faces easier comparables. Moreover, price increases initiated in late second quarter should help the company mitigate some of the cost pressure Mohawk experienced in the first half of the year. These two developments could facilitate a modest near-term bump in the stock price, but more importantly, Kearney believes they will lift the cloud of pessimism hanging over the stock and pique renewed interest in Mohawk's highly opportunistic long-term fundamentals.
Campbell Soup Company
Moat: Wide | Risk: Below Avg | Price/Fair Value Ratio*: 0.85 | Three-Year Expected Annual Return*: 15.6%
What It Does: Campbell Soup Company (CPB) is the largest seller of soups in the world and a leading producer of juices, sauces, cookies, crackers, salty snacks, and confectionery products. The company's soups are sold under the Campbell's brand globally as well as under the Erasco and Liebig brands in Europe. Its other key products include Pepperidge Farm cookies and crackers, V8 juice beverages, Pace Mexican sauces, Prego pasta sauces, Arnott's biscuits and salty snacks, and Godiva chocolates.
What Gives It an Edge: Morningstar analyst Greggory Warren believes Campbell's wide economic moat is founded on its U.S. soup business, which along with its domestic sauce and beverage businesses accounts for 45% of sales and 65% of operating profits. The company is the largest producer of soups in the United States, outselling the next leading branded soup maker by a margin of nearly seven to one. Controlling more than 70% of the $4 billion domestic market for soup has allowed Campbell to generate 25% operating margins in this segment, making it one of the most profitable businesses in the packaged food industry. The company's returns on invested capital, which are nearly double the industry average, separate the company from the rest of the pack.
What the Risks Are: Warren believes Campbell's greatest risk is that condensed soup, which accounts for 50% of U.S. soup sales and 15% of the firm's total revenue, continues to decline in popularity with consumers. The business is extremely profitable, and Campbell has been unable to generate products that can replicate the type of operating margins produced by its condensed soup line. With close to 35% of annual sales generated outside the United States, the firm, according to Warren, is also exposed to foreign currency risk.
What the Market Is Missing: Warren thinks Campbell's stock has traded down of late because the company missed the consensus earnings estimate for its last quarter due to a restructuring of the supply chain in Australia/Indonesia and a marked increase in marketing spending in the U.S. for new product launches and brand support. Warren sees no real problem with either event, and we commend the company for using its excess profits to ramp up marketing spending ahead of new product launches and the start of the all-important fall and winter soup season. Warren also believes Campbell's increased focus on its non-soup product lines should enhance the company's ability to weather the temporary shortfalls that come with running a soup business. In Warren's opinion, Campbell's seemingly insurmountable stranglehold on the U.S. soup category, and its willingness use its marketing dollars to promote its strongest brands, should allow the firm to continue to hold on to its wide-moat status.
Other New 5-Star Stocks
Automatic Data Processing (ADP)
Gevity HR
Premier Financial Bancorp
United Parcel Service (UPS)
* Price/fair value ratios and expected returns calculated using fair value estimates, closing prices, and cost of equity estimates as of Friday, Sept. 14, 2007.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.