Markets

Stock Focus: Book-Value Bargains

Jody Yen, Forbes.com, 05.16.01, 8:47 AM ET

NEW YORK - Generations of fundamental investors learned from the master, Benjamin Graham, to look for stocks that were cheap relative to their book value. Book value is a measure of what a firm's assets are worth after deducting for depreciation and other claims on the company, such as short- and long-term liabilities.

Tangible book value measures physical assets, such as factories, office buildings, real estate and inventories. Excluded from tangible book value are such intangible items such as patents, trademarks and the premium paid when acquiring another company--goodwill.

Assets, of course, are only worth what a buyer is willing to pay for them. A company is likely to have a hard time finding a buyer to pay book value for an antiquated factory or obsolete inventory. This limitation aside, book value is still a useful metric for valuing stocks. In fact, the dot-com collapse is a reminder that physical assets still have value.

One potential book-value bargain is Robert Mondavi(nasdaq: MOND - news - people), an Oakville, Calif.-based vintner. Though not a classic book-value bargain in the Ben Graham sense, in a world where the Standard & Poor's 500 trades for 6.2 times tangible book, a stock such as Mondavi, with a price-to-tangible book of 2 seems relatively cheap.

Mondavi's vineyards account for 15% of total assets of $873 million; the rest is tied up in inventories, agricultural supplies and other items. Shares of Mondavi sell for 17 times estimated 2001 profits and 14 times estimated earnings for next year. (The firm's fiscal year ends in June.)

The following table lists five companies whose stocks trade at no more than three times their tangible book. Each company's five-year average return on equity is at least 14%. All these stocks sell for less than 18 times estimated 2001 profits and are expected to post at least 11% average annual earnings growth over the next three to five years.

Auto racing is the fastest growing spectator sport in the U.S., yet Speedway Motorsports (nyse: TRK - news - people) sells for a modest 2.9 times tangible book. Most of Speedway's revenue come from ticket sales at its six company-owned U.S. tracks, including Las Vegas Motor Speedway and Atlanta Motor Speedway.

Speedway stock recently took a hit due to the cancellation of the Firestone Firehawk 600 race at Texas Motor Speedway. Drivers practicing for this race were, apparently, passing out from the high speeds on the banked track. Despite this setback, security analysts expect Speedway's earnings will increase 28% this year.

Athletic footwear and apparel maker Reebok International(nyse: RBK - news - people) has a price-to-tangible book value of 2.8 versus 3.5 for rival Nike (nyse: NKE - news - people). In spite of a slight decline in revenue last year--due in part to unfavorable currency exchange rates--Reebok's earnings rose 30% in the first quarter.

In December, Reebok signed a ten-year exclusive licensing agreement with the NFL, beginning with the 2002 football season, and, in February, Reebok bought selected assets from LogoAthletic, formerly the largest supplier of NFL-licensed apparel. Reebok trades at 16 times 2001 estimated earnings.

Stocks With Cheap Price-To-Book-Value Ratios

Company Price PBV PE ROE EPS Growth* MV

Constellation Brands $35.17 1.1 6 14% 16% $1,649

Reebok International 27.76 2.9 16 15 11 1,624

Robert Mondavi 49.72 2.0 17 14 18 794

Speedway Motorsports 21.96 2.9 15 15 18 917

Wendy's International 25.21 2.7 15 14 14 2,865

Prices as of May 15. EPS: Earnings per share. P/E: Price-to-earnings ratio. *Annualized; projected over the next three to five years. Sources: FT Interactive Data, Market Guide, Thomson Financial/IBES via FactSet Research Systems