Loading...

This week we are focusing our attention on companies that have established strong track records for steadily increasing profits. We started by screening for companies that have delivered average annual earnings growth of at least 10% for both the past year and the past five years. Out of this group, we then examined our long-term profit projections to identify those that appear poised to extend this favorable track record over the next 3 to 5 years. (Once again, we set the bar at 10% for average annual share-net gains out to 2016-2018.) Only about one-in-10 of the roughly 1,700 companies in our universe managed to meet these stringent criteria.

Not surprisingly, the stocks of many of these companies are in high demand with investors. Still, we did identify a number that appear to trade at modest valuations. Specifically, about 50 of these equities have P/E ratios of less of 16.0, which would represent a discount of 10% or more from the broader market multiple of 17.6. The ten we list below also carry Safety ranks of 1 (Highest) or 2 (Above-Average), suggesting that they are suitable for a wide variety investors, including those with a limited tolerance for risk.

Company

Ticker 

   Safety Rank

   Current PE Ratio

   EPS Growth 5-Year

   Proj EPS Growth Rate

Bed Bath & Beyond

BBBY

1

          14.4

          13.5

          12.5

CVS Caremark

CVS

1

          14.3

          13.0

          11.5

Apple Inc.

AAPL

2

          12.3

          62.5

          14.5

Can. Nat. Railway

CNI

2

          15.7

          11.0

          10.0

DaVita HealthCare

DVA

2

          14.4

          15.0

          14.5

Elbit Systems

ESLT

2

            9.9

          19.5

          12.0

Gap (The), Inc.

GPS

2

          14.8

          12.0

          13.0

Infosys Ltd. ADR

INFY

2

          14.4

          19.5

          11.0

Qualcomm Inc.

QCOM

2

          14.3

          14.5

          11.5

Union Pacific

UNP

2

          15.8

          20.5

          12.0

Out of this elite group we have chosen to highlight Qualcomm Inc. (QCOM), one of the world’s leading suppliers of chipsets. The San Diego-based company develops and markets CDMA-based integrated circuits and system software, which are sold to manufacturers of mobile phones and other wireless and wired devices. Qualcomm also collects license fees and ongoing royalties from manufacturers of wireless devices. This stems from the significant intellectual property, including patents and trade secrets, accumulated by the company through its role in developing and commercializing CDMA technology, which is widely used in wireless communications networks. 

Powered by surging global demand for smartphones, Qualcomm appears set to report another year of record sales and earnings for fiscal 2013. (Year ends on September 29th.) Still, support for QCOM stock, despite picking up over the summer, has been somewhat muted this calendar year (up about 13%) compared to the gains generated by the broader market benchmarks. The share price also hasn’t kept pace with the company’s impressive operating performance, and the stock now trades at a P/E of less than 15.0 (based on our earnings estimates through next March), compared to a median multiple of 17.6 for the Value Line universe.

The lackluster performance likely reflects concerns in some quarters about slower growth in high-end devices and the potential for increased competition in the LTE space, a market that Qualcomm currently has nearly all to itself. Still, at the current valuation, this equity looks well positioned to provide worthwhile total returns in the 3 to 5 years ahead, particularly on a risk-adjusted basis. Notably, the stock carries our Highest rank for Safety (1), reflecting the company’s impressive financial might (no debt and nearly $7 a share in cash) and relatively stable share price. It also provides a decent measure of current income, with a yield of 2.0%, versus 2.1% for the typical dividend-paying equity. Notably, this year’s likely payout represents a relatively modest 28% of annual profits, and we figure the dividend will increase at least in line with earnings through 2016-2018.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.