- Pfizer (PFE): Robust cash inflows from covid-19 vaccine sales and growth visibility with dividend upside potential.
- AT&T (T): Attractive after the media division spin-off with healthy cash flow potential as 5G adoption increases.
- Equinor (EQNR): Low break-even assets provide robust free cash flow visibility.
- Apple (APPL): Emerging segments like wearable and services will deliver earnings growth and sustained cash flow upside.
- Altria (MO): Initial results of business transformation to non-smokable products looks encouraging.
- Target (TGT): Healthy comparable store sales growth while building a stronger omnichannel presence.
- Freeport-McMoRan (FCX): Copper production upside visibility for 2022 and 2023.
The returns that some undervalued large-cap stocks can generate over the long term is underrated.
The Dow Jones U.S. Large-Cap Total Stock Market Index has delivered annualized returns of 12.19% in the last 10-years. During the same period, the mid-cap and small-cap indexes have returned 10.67% and 9.75% respectively.
This data underscores by view on exposure to large-caps. In particular, if there are pockets of value in the large-cap segment.
Currently, the U.S. is facing the highest inflationary pressure in 40-years. Additionally, the escalation of geopolitical tensions has translated into global economic uncertainty leading to speculation about a possible recession in 2023.
Multiple rate hikes in 2022 could translate into a global tightening of liquidity. Given these factors, it makes sense to go overweight on large-cap stocks that are also low-beta stocks.
The good news for investors is that there are undervalued large-cap stocks that are worth considering. These stocks have limited downside potential but can deliver 20% to 30% returns in the next 12-months.
Undervalued Large-Cap Stocks to Buy: Pfizer (PFE)
Pfizer (NYSE:PFE) stock has trended higher by 33% in the last 12-months, but it is still undervalued.
For 2022, Pfizer has provided a $6.45 earnings per share guidance. At current levels, PFE stock is trading at about eight times forward earnings. Clearly, there is potential for upside with revenue growth visibility.
It’s also worth noting that the company’s vaccine against covid-19 has been a cash flow machine. As of December 2021, Pfizer reported $31 billion in cash and short-term investments with an operating cash flow of $32.5 billion.
With high financial flexibility, Pfizer is positioned to accelerate the deep pipeline of clinical trials. The company has also pursued three acquisitions in the last six months. As pipeline candidates are commercialized, the company has steady growth visibility.
PFE stock is also among the top names to consider for income investors. Currently, the stock offers a dividend yield of 3.0%. Considering the balance sheet healthy and cash flow visibility, PFE stock is a quality dividend growth stock to buy.
Overall, even after revenue from the covid-19 vaccine sales drops, Pfizer has a healthy growth pipeline making this low-beta stock is worth holding in the long-term portfolio.
With the media division spin-off completed AT&T (NYSE:T) stock is on the mend.
Raymond James analyst Frank Louthan believes that T stock will see higher institutional interest after the spin-off. Frank has a price target of $26 for the stock. The stock trades just shy of $19.50 today.
For 2021, AT&T reported revenue of $30.2 billion from the communications segment. The segment-adjusted EBITDA was $10.6 billion for the same period. With a healthy EBITDA margin, the free cash flow outlook is robust.
There also has been sustained improvement in the company’s post-paid and pre-paid subscribers. For Q4 2021, AT&T reported 884,000 post-paid phone net adds along with 24,000 prepaid phone net adds.
In the last few years, AT&T has invested significantly in its 5G network. This will help in accelerating subscriber growth in the coming years.
Overleverage has been one of the key headwinds for T stock in the past. With the spin-off, the company is also focusing on improving the balance sheet. The company expects net-debt reduction to 2.5x by the end of 2023.
Overall, the downside seems capped for T stock from current levels. If business developments remain positive, the upside potential can be meaningful.
Undervalued Large-Cap Stocks to Buy: Equinor (EQNR)
With Brent trading at more than $100 per barrel, the oil and gas sector remain an attractive investment.
Equinor (NYSE:EQNR) has surged by 97% in the last 12-months.
However, the stock still looks attractive from a valuation perspective. Currently, EQNR stock trades at an EV/EBITDA of 2.9.
The Norwegian energy sector trades at an average EV/EBITDA of 4.7. This implies a 62% valuation gap. I would therefore not be surprised if the rally for EQNR stock sustains.
In terms of business fundamentals, Equinor is attractive considering the low break-even assets. The company has guided for free cash flow of $45 billion between 2021 and 2026.
This guidance is under the assumption of oil trading at $60 per barrel.
This will allow Equinor to accelerate exploration as well as the development of assets. At the same time, the company plans to invest $23 billion in the renewable sector. Investments can potentially increase as FCF swells.
EQNR stock is also attractive from a dividend perspective. Currently, the stock offers a dividend yield of 2.0%. Given the visibility for higher FCF, it’s likely that dividend growth will sustain in the next few years.
For Q1 2022, Apple reported 25% earnings growth. I believe that growth is likely to remain healthy for the following reasons.
First, the wearable and services segment growth has been robust. The global wearable market size is expected to reach $118.16 billion by 2028. Through innovation in products, Apple is well-positioned to gain market share and sustain growth.
Furthermore, Apple reported revenue growth of 11% in Q1 2022. However, in terms of region, Asia Pacific revenue growth was 20%.
There is ample scope for growth in emerging markets (excluding China). Recently, Apple announced it would manufacture the iPhone 13 in India, which is another potentially big market.
It’s also worth mentioning that for Q1 2022, Apple reported an operating cash flow of $46.9 billion.
The company’s business is a cash flow machine and Apple has a strong balance sheet. This allows the company to invest in innovation and inorganic growth.
Undervalued Large-Cap Stocks to Buy: Altria (MO)
At the beginning of December 2021, Altria (NYSE:MO) stock was trading at $42.6. The stock is trading higher today. It will open at around $55.37.
Even after this rally, MO stock is undervalued at a forward P/E of 11.3. Additionally, a dividend yield of 6.6% makes the stock attractive for income investors.
One reason Altria’s valuation is depressed is the gradual decline in the volume of smokable products. However, there are two positive factors to consider.
First and foremost, the smokable product segment remains the key cash flow driver for Altria. For 2021, revenue from smokable products declined by 1% on a year-on-year basis.
Therefore, the decline in revenue is not sharp. With strong free cash flows, Altria is well-positioned to sustain dividends.
Furthermore, Altria has undertaken a long-term business transformation with a focus on oral tobacco, heated tobacco and the e-vapor segment. The cash flow from the smokable product segment will be deployed in these emerging businesses.
I am also positive on the company’s stake in Cronos (NASDAQ:CRON). Recently, the U.S. Congress cleared an important legislation that’s designed to legalize marijuana at federal level. Once the regulatory headwinds are cleared, CRON stock can create value.
Overall, MO stock is among the undervalued large-cap stocks that’s worth holding in the portfolio. I would expect the stock to deliver healthy returns in the next 12-24 months.
Target Corporation (TGT)
Among retail stocks, Target (NYSE:TGT) seems undervalued on a relative basis.
It’s also worth mentioning that the stock offers an annualized dividend of $3.60.
Earlier this month, Barclays named Target as the top retail pick.
Analyst Karen Short notes that Target “has clearly gained footstep/mindshare/market share during the pandemic.”
Short has price target of $280 for the stock and this would imply an upside potential of 14% from current levels.
For Q4 2021, Target reported comparable sales growth of 8.9%. This was on top of a 20.5% comparable sales growth in Q4 2020.
As Target boosts its omnichannel sales capabilities, comparable store sales growth is likely to remain strong.
In March 2021, Target also announced that it will spend $4 billion annually to improve its fulfillment capabilities, open new stores and remodel existing ones.
Freeport-McMoRan (NYSE:FCX) stock has trended higher by 2o% year-to-date and nearly 40$ over the last 12 months. Sill, the stock seems undervalued considering the growth outlook. A forward P/E of 13.3 underscores my view at a time when analysts are bullish on copper.
Recently, a Goldman Sachs analyst opined that copper price is likely to hit $11,500 per metric ton in three months.
Further, the price is expected to trend higher to $13,000 per metric ton by the end of 2022. If this holds true, Freeport is positioned for a healthy EBITDA margin and cash flow upside.
Freeport reported copper sales of 3.8 billion lbs for 2021. The company has guided for sales of 4.3 and 4.5 billion lbs for the next two years. Therefore, Freeport is positioned to benefit from higher prices and incremental production increases.
With higher cash flows, Freeport has also improved its balance sheet. For 2020, the company reported net-debt of $6.1 billion.
Net debt has declined to $1.4 billion as of December 2021. This gives the company ample financial flexibility to invest in growth. At the same time, dividends are likely to increase if copper prices remain firm.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.