The salient features of today's economy suggest a value-based investment methodology might profit from the current market environment. First, high yet stable interest rates might come into play, providing value stocks with systemic support. In addition, growth stocks have outperformed value stocks by a substantial amount since the turn of the year, which is usually a leading indicator for pending value stock outperformance.
As such, here are two deep-value stocks to consider.
British American Tobacco
A series of unfortunate events coupled with a dislike of consumer staples stocks from investors has led to a nearly 20% drawdown for British American Tobacco PLC's (BTI, Financial) stock. The good news is the stock's recent slump has sent it into undervalued territory. Moreover, various indicators suggest an operational turnaround is en route for the company.
Progress in non-combustible products division
British American Tobacco released an updated trading report in June.
The report's primary feature was the progress made within the company's non-combustible products division, which now spans approximately 15% of its revenue. The company's non-combustible customer base expanded by an estimated 900,000 in its first quarter, handing British American Tobacco another boost in its quest to reach 5 billion pounds ($6.24 billion) in annualized non-combustible revenue by 2025.
Revenue growth and transition into a "modern company"
Further, British American Tobacco's management team revealed a full-year revenue growth forecast of 3.5%, which is significant considering the tobacco industry's sales volumes are expected to recede by 3%. As previously mentioned, the company plans to eventually end its reliance on tobacco product sales by using its robust balance sheet to acquire up-and-coming "new product" companies.
An industry it is specifically targeting is the e-cigarette arena, in which consumption grew by 50% between 2020 and 2022. Although there is still a long way to go, British American's transition into a "modern company" looks promising thus far.
Stock valuation and dividend yield
The discounted cash flow model provides a valid premise for the claim that British American Tobacco's stock is in deep-value territory. If a terminal growth rate of 4% is assumed, the model suggests the stock is undervalued by roughly 19.90%.
Lastly, British American Tobacco possesses a dividend yield of 8.14%, providing a lucrative opportunity to income-seeking investors. The company remains focused on deleveraging its balance sheet after an unplanned increase in gearing during the Covid-19 pandemic, which could result in higher dividend yields for its shareholders.
Alpha Metallurgical Resources
Shares of Alpha Metallurgical Resources Inc.'s (AMR, Financial) have surged by more than 15% since the turn of the year, which shows how resilient the company is given that coal prices have toppled by nearly 50% in the same period.
Source: Markets Insider
Future prospects and earnings report
A top-to-bottom analysis of Alpha Metallurgical Resources suggests that further gains are in store. Coal prices have likely bottomed out; energy commodities usually hit their lows when interest rates peak. The word from the Federal Reserve is that an interest rate pivot might initiate in early 2024. Therefore, coal prices will likely soon find support as they are priced in advance (in the futures market).
A more inward look at the company provides a sense of encouragement. Alpha Metallurgical released its first-quarter earnings report in May, revealing an earnings per share beat worth $2.89. It achieved $911.24 million in revenue during the period as its export price realization achieved a staggering $211.31 per metric ton. Moreover, the company reached an Ebitda number of $354.40 million as it managed to suppress its production costs by 1.9% during the quarter, while most other miners experienced an increase in their cost bases.
Business model and shareholder value
It is critical to note that although Alpha Metallurgical's operations are primarily cost-intensive underground endeavors, it has access to some of the best-graded coal in the world. Moreover, the company has significant port capacity, supporting a vertically integrated business model, which produces profits throughout the economic cycle.
Alpha Metallurgical Resources continues to pass down value to its shareholders via share buybacks and dividends. The company is in the middle of a $1.2 billion share repurchase program, which, if added to its forward dividend yield of 1.24%, suggests its shareholders are being rewarded dearly. As such, it is no surprise that the DCF model prices the stock at $861.16, which is more than 80% higher than its current share price.
Final word
The current market environment suggests deep-value stocks are set to prosper. Among the best-in-class deep-value stocks are British American Tobacco and Alpha Metallurgical Resources. The prior is an oversold asset, which could benefit from a pivot of its internal growth drivers, whereas the latter is well-placed to gain from a potential coal price recovery and access to top-drawer coal grades.
