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Andrew T. Gillies is Director of Communications at the Center for Audit Quality, an affiliate of the American Institute of CPAs, in Washington, DC. Based in Washington since 2002, he has also worked in editorial and communications roles at the Investment Company Institute, the World Bank, Forbes, and Vault.com. His policy-themed writing has focused on aerospace and defense, energy and environment, transportation, and financial services.

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 Forbes.com