Friday, December 20, 2002

Big Companies On The Cheap

The members of the Forbes Platinum 400--the best big companies in America--meet some tough standards for return on capital and other performance measures. A handful of these companies are also on Wall Street's discount rack.

One example: Safeway, which operates 1,775 supermarkets throughout the country. Yes, bargains often come with a catch: In Safeway's case, there are concerns about slowing sales trends and slipping gross margins. Investors have also fretted the Pleasanton, Calif.-based food retailer will get crushed as Wal-Mart Stores moves more aggressively into the grocery business. Safeway stock trades 51% below a 52-week high.

At its recent price, however, Safeway goes for just nine times earnings per share for the past 12 months, versus a five-year historical multiple of 22. The average P/E for its Platinum industry group peers is 17. If Safeway can ward off the challenge from Wal-Mart, the stock could move closer to its historical valuation, or at least its industry average.

Another encouraging item is Safeway's price-to-earnings-growth ratio, or PEG. Analysts reporting to Thomson Financial/IBES expect Safeway to post long-term annualized earnings growth of 12%. The stock's price-to-earnings ratio (P/E)--calculated using projected next 12-month profits of $2.55--is 9, which gives Safeway a PEG of 0.8. A PEG below 1.0 often signals a cheap stock.

To find similar bargains, we looked for Platinum companies with multiples for price-to-sales, price-to-book value and price-to-cash flow below the averages for their respective industries. We dropped stocks with latest 12-month P/Es over 20. The seven stocks below carry an average estimated 2003 P/E of just 11, well below the S&P 500's multiple.

Full story at