During the 10-year run of this bull market, one thing has been painfully obvious to long-time investors: value stocks, and indeed the entire sector, have woefully underperformed growth. Value stocks are those that tend to trade at a lower price relative to their fundamentals (including dividends, earnings and sales). Given the market uncertainty, most of which is directly tied to the current trade issues, it makes sense to look at value and perhaps shift some capital there.
Each week Jefferies presents some of the top value ideas that the firm has, and this week’s group is chock full of well-known companies that for a variety of reasons have landed in value territory. All make sense for accounts looking to stay in equities but nervous about the current market turmoil.
This stock has had plenty of negative press recently due to the 737-MAX issues. Boeing Co. (NYSE: BA) is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. The different segments in the company are Commercial Airplanes; Boeing Defense; Space & Security; and Boeing Capital. The latter provides financial solutions facilitating sale and delivery of Boeing commercial and military aircraft, satellites and launch vehicles.
Last year, Boeing and Embraer signed a nonbinding memorandum of understanding to create a new strategic partnership for commercial aviation. The new joint venture is valued at $4.75 billion, which values Boeing’s 80% share at $3.8 billion.
The 737-Max remains grounded, and sales are as well, but Jefferies is confident in the long-term Boeing story. They noted this:
We met the CFO last week. Following our discussions, we are confident that the long-term free cash flow story remains largely unchanged. That said, we removed some upside from our bull case scenario as it relates to aircraft pricing and multiple re-rating. On May 23rd, the FAA has invited 57 global regulators to review the recent upgrades to MAX’s flight control system. The outcome should eventually lead to the FAA removing the grounding. Management reiterated that the resumption of deliveries is a matter of “when” rather than “if”
Boeing shareholders receive a 2.38% dividend. The Jefferies price objective for the shares is $448, and the Wall Street consensus target is $422. The stock closed Wednesday at $345.64 per share.
This is a top Permian Basin play for more aggressive accounts. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.
Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.
Jefferies noted this after the company posted earnings last week:
EBITDA missed on weak price realizations, but pricing should improve going forward. Capex for the quarter was 15% below expectations, a positive and the board approved a $2 billion buyback which is expected to be completed by the end of 2020, and equates to ~12% of shares outstanding. The buyback suggests management sees a better opportunity in its own stock than in mergers and acquisitions. Shares trade at less than 5x Enterprise Value to EBITDA on 2020 estimates.
Jefferies has a $168 price target, while the consensus target is lower at $154.15. The shares closed at $109.06 on Wednesday.
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