After a multi-year bull run ended in 2021, equity investors experienced a rapid pullback in the valuations of companies across most sectors in 2022. Though we have seen a modest bounce in 2023, investors continue to be concerned about multiple macroeconomic factors that could negatively impacting companies' financials, including the conflict in Ukraine, interest rate hikes, and inflation.
Although the current environment remains challenging and uncertain, this negative market sentiment provides an opportunity for investors to seek out stocks that are trading at a discount to their intrinsic value. In this article I am going to highlight three such undervalued large-cap stocks that I believe are worthwhile long-term investments at their current valuations.
A large-cap stock refers to a publicly traded company with a large market capitalization, which is the total value of all its outstanding shares of stock. Market capitalization is calculated by multiplying the company's current stock price by the total number of its outstanding shares. Large-cap stocks are typically considered to be established and well-known companies with a significant market presence, substantial financial resources, and a relatively stable stock price.
There is no universal definition for what constitutes a large-cap stock, but they are generally considered to have a market capitalization of $10 billion or more. Large-cap stocks are typically associated with relatively lower risk compared to smaller-cap stocks, as they are often perceived to be more stable and less volatile. They are also known for paying dividends and may be considered as core holdings in long-term investment portfolios.
Broadcom
One of the largest technology companies in the world, Broadcom (AVGO) designs, develops, and supplies a wide range of semiconductor and infrastructure software solutions. Its infrastructure software solutions allow customers to plan, automate, manage, and develop applications across cloud, mobile, and mainframe platforms.
Several large Fortune 500 companies and government agencies rely on Broadcom for its software solutions to help manage and secure on-premise and hybrid cloud environments.
Valued at a market cap of $265 billion, Broadcom stock has returned a staggering 2,530% to shareholders in the last ten years after adjusting for dividends. Despite these outsized gains, AVGO stock offers shareholders a forward yield of almost 3%, which is quite attractive.
In Q1 of fiscal 2023 (ended in January), Broadcom grew sales by 16% year over year to $8.9 billion while adjusted earnings per share stood at $10.33, rising 23% year over year. Its free cash flow also increased by $548 million to $3.93 billion in Q1.
Broadcom ended Q1 with a cash balance of $12.6 billion after spending just over $100 million in capital expenditures and $1.5 billion on share repurchases. It also paid shareholders a cash dividend of $4.60 per share, amounting to $1.92 billion, indicating a payout ratio of less than 50%.
Broadcom has enough room to expand its dividend payouts or reinvest in organic growth, driving future cash flows higher. In the last 12 years, its dividends have increased by 41% annually, which is exceptional.
AVGO stock is priced at 16.6 times forward earnings and is forecast to increase the bottom line by 10% in the next five years. It's also trading at a discount of 10%, according to consensus price target estimates.
United Rentals
United Rentals (URI) is an equipment rental company valued at a market cap of $26.2 billion. It offers customers access to various equipment, including forklifts, water pumps, and power tools.
United Rentals ended 2022 with revenue of $11.6 billion and an operating income of $3.2 billion, indicating a margin of 28%. In the next 12 months, United Rentals forecasts sales between $13.7 billion and $14.2 billion, which suggests the top line will expand between 18% and 22% year over year.
With 1,426 locations in North America, United Rentals also has a presence in Europe, Australia, and New Zealand. Armed with a highly-diversified product mix, United Rentals has returned 635% to shareholders since April 2013.
In this period, the company has increased sales by 11%, adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 12.2%, and adjusted earnings by 24% annually.
The consistent expansion of profit margins has allowed United Rentals to approve a dividend program in 2023. Accordingly, it announced a quarterly dividend of $1.48 per share, indicating a forward yield of 1.5%.
Priced at 9x forward earnings and 1.8x forward sales, United Rentals is undervalued, given its forecast to increase earnings by 15.5% in the next five years.
Analysts remain bullish and expect URI stock to gain another 12% in the next 12 months.
Airbnb
Airbnb (ABNB) is a company that has revolutionized global travel. In Q4 of 2022, Airbnb reported sales of $8.4 billion, an increase of 40% year over year. This impressive performance enabled Airbnb to report its first full year of GAAP profits. The company also reported a free cash flow of $3.4 billion, an increase of 49% year over year.
Travel demand is expected to remain robust globally despite a sluggish macro economy. As lockdown restrictions are finally over, Airbnb is well-positioned to benefit from multiple secular tailwinds in 2023 and beyond.
Airbnb ended 2022 with 6.6 million global listings, up 900,000 year over year. Bond rate increases will also allow Airbnb to increase its earnings as the company earns interest on the amount collected between bookings and eventual stays. In 2022, interest income stood at $186 million, which might rise to $500 million in the next 12 months.
Valued at a market cap of $75 billion, ABNB stock is priced at 36x forward earnings and 7.8x forward sales, which might seem steep. However, Wall Street expects Airbnb to increase adjusted earnings by 21% annually in the next five years.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
