TNE Tele Norte Leste Participacoes S.A. Common Stock

In big, indiscriminate sell-offs in the market, there are always some companies that just get “stupid cheap.” They might not be the best companies in the world, but they are simply being given away. I’m not talking about companies that are falling apart, just ones that might not be the most exciting in the world.

To make sure I’m not looking at firms that are on the verge of implosion, I required that they have a Zacks #1 Rank (Strong Buy) or Zacks #2 Rank (Buy). That means that they are in the top 20% of all firms based on recent earnings estimate revisions and earnings surprise.

Setting Up the Screen

Rather than just rely on one dimension of value, I decided to look for companies that were cheap on a variety of measures. I always consider earnings to be the single most important thing to look for when evaluating a stock. After all, without earnings it is impossible to pay out dividends for very long.

Still, there are times when earnings can be misleading, particularly if accounting games are played to make them look better than they really are. I looked for companies that were trading for less than 10X this year’s earnings and less than 9x next year’s expected earnings. Most of the firms that made the final cut are much cheaper than that.

I then looked for companies that are trading below book value -- the historical value of their assets minus their liabilities per share. Provided that the asset values of on the companies books are accurate, that means that the company could well be worth more dead than alive. If you could sell off all the assets at their balance sheet values, and then pay off all the liabilities, you would make a profit. That provides a very good margin of safety.

In my experience, a high price-to-book-value does not always mean that a company is expensive, but a very low price-to-book-value generally means the company is cheap (Financial stocks are often the exception to that, particularly now, since I think that the book values of many of their assets belong on the fiction shelf).

I also wanted companies that provide at least something in the way of a dividend yield. Unlike some of my other recent posts, the dividend was not the prime consideration, although several of the firms do have attractive yields. My cut off was a dividend yield of at least 0.5%. Not huge, but better than you get on a 3-year T-note.

Enterprise Value to EBITDA

My final valuation criteria was sort of a variation on the P/E that takes debt into account. It is the ratio of Enterprise Value, (EV, market capitalization plus long-term debt minus cash on hand) to EBITDA (Earnings before interest taxes Depreciation and Amortization). In effect, EV is the price you would have to pay if you were a private equity investor buying the whole firm. EBITDA, is the cash that you would have available to you to pay any debts incurred in buying the company.

I was real tough on this one, requiring that it be trading for less than 5X EV/EBITDA. At current prices, these firms would be terrific LBO candidates. Alternatively, the companies could redirect their cash flow into buying back their stock, and eventually the people who didn’t sell would have massive stakes in the company.

Theoretically the cheapest firm on the list, Volkswagen (VLKAY), could redirect all of its cash flow to buying back stock and in less than one year have bought back every last share (provided of course that all that buying didn’t bid up its price -- and doing so would not be great for the company’s long term health, and I doubt it would ever get Government/Union approval for such a thing). They might, however, buy back say 10% or even 20% of the firm without doing much damage to its long-term competitiveness.

The table below shows the valuations on these firms, sorted by EV/EBITDA. Please note that the Valuations are based as of the close 8/9/11, but the prices shown in the write up are as of the close today, after the S&P came back from Wednesday's big fall.

Being cheap is not aways great protection in the short term, and most of these firms were also down. However, it does mean the the table significantly understates just how cheap these firms are. The companies range in size from tiny, like Chesapeake Financial (CPKF), a small bank in Virginia, to some of the largest oil companies in the world, albeit ones based in Russia. After the table, I have short company descriptions from Yahoo Finance.

Company	Ticker	P/E using Curr FY Est	P/E using Next FY Est	Price/ Book	EV/EBITDA 12 Mo	Price/ Sales	Div Yield
Volkswagen-Adr	VLKAY	4.75	5.19	0.66	0.73	0.26	1.51%
Rwe Ag -Sp Adr	RWEOY	6.32	5.49	0.93	1.34	0.35	7.98%
Lufthansa –Adr	DLAKY	7.83	7.16	0.76	1.81	0.22	3.49%
Telenorte L Adr	TNE	6.68	5.93	0.33	2.23	0.30	3.63%
Korea Tele-Adr	KT	6.50	6.67	0.87	2.95	N/A	4.78%
Bunge Ltd	BG	9.51	8.97	0.68	3.46	0.18	1.44%
Lukoil Hldg-Adr	LUKOY	4.80	4.47	0.82	3.56	0.47	2.94%
Chesapeake Finc	CPKF	6.01	5.68	0.87	3.64	0.86	3.43%
Gazprom Neft	GZPFY	3.52	3.12	0.95	4.10	0.54	2.99%
Oriental Finl	OFG	9.73	7.02	0.81	4.40	1.56	1.71%
Valero Energy	VLO	5.69	5.21	0.77	4.40	0.12	0.97%

Volkswagen Aktiengesellschaft (VLKAY, $31.05) manufactures automobiles. The company operates in two divisions, Automotive and Financial Services. The company provides its products under the Volkswagen, Audi, SEAT, Skoda, Volkswagen Commercial Vehicles, Bentley, Bugatti, Lamborghini and Scania brand names, as well as services under the Volkswagen Financial Services brand name. Volkswagen Aktiengesellschaft operates primarily in Europe, North America, South America and the Asia-Pacific.

RWE Aktiengeshellschaft (RWEOY, $38.00) engages in the generation, trading, transmission and supply of electricity and gas. The company generates electricity from lignite, coal, nuclear fuel, gas, renewable energies, pumped storage, and oil. It also operates wind farms, hydroelectric power plants, and biomass plants. The company offers its products and services primarily to private and commercial customers, industrial and corporate customers, and distributors primarily in Germany, the United Kingdom, the Netherlands, Belgium, and central and south-eastern Europe. It provides electricity to approximately 16 million customers and gas to approximately 8 million customers.

Deutsche Lufthansa Aktiengesellschaft (DLKAY, $17.09) an aviation company, provides passenger transport, airfreight and airline services worldwide. It operates in five segments: Passenger Airline Group, Logistics, MRO, IT Services, and Catering. Further, it offers business travel management solutions in the area of payment and analysis of corporate travel. As of June 01, 2011, the company’s fleet included 710 aircraft with an average age of 10.9 years.

Tele Norte Leste Participacoes S.A. (TNE, $13.00) provides telecommunication services primarily in Brazil. It offers a portfolio of integrated and convergent communication products that include regular fixed and mobile telephony, data transmission, and ISP services. It also operates a network of underwater fiber optic transmission cables connecting Brazil, Venezuela, Bermuda, and the United States and an Internet portal called iG. In addition, the company, through its subsidiary, WAY TV Belo Horizonte S.A., provides pay TV and broadband Internet services, as well as interactive services, such as distance learning, telephony, and telemedicine courses. It offers its services under the Oi and Turbo brands to residential, commercial, corporate, government and other customer areas.

KT Corporation (KT, $15.54) provides integrated telecommunications services in Korea. It offers personal communications services, mobile telecommunications services, and third-generation HSDPA-based IMT-2000 wireless Internet and video multimedia communications services. As of December 31, 2009, it offered mobile services to approximately 15.0 million subscribers; and broadband Internet access services to 7.0 million subscribers, as well as operated 17.0 million lines that provide fixed-line telephone services

Bunge Limited (BG, $61.60) engages in the agriculture and food businesses in approximately 30 countries. It buys, sells, stores, and transports oilseeds and grains; processes oilseeds to make protein meal for animal feed, and edible oil products for commercial customers and consumers; produces sugar and ethanol from sugarcane; mills wheat and corn to make ingredients used by food companies; and sells fertilizer in North and South America.

OAO Lukoil (LUKOY, $56.00) together with its subsidiaries, engages in the exploration, production, refining, marketing, and distribution of oil and gas in Russia and internationally. Its exploration and production activities are primarily located in Russia, Azerbaijan, Kazakhstan, Uzbekistan, the Middle East, South America, and northern and western Africa. The company also engages in refining, marketing, and trading of crude oil, natural gas, and refined products; and processing and trading of petrochemical products. Further, it operates approximately 6 thousand petrol stations in 27 countries under the LUKOIL brand name, as well as involves in the wholesale of refined products.

Chesapeake Financial Shares, Inc. (CPKF, $14.00) operates as the holding company for Chesapeake Bank that provides personal and business banking products and services in Virginia. It operates 11 offices in the Northern Neck and Middle Peninsula, including Kilmarnock, Lively, and Irvington on the Northern Neck; and Mathews, Hayes, and Gloucester on the Middle Peninsula, as well as 4 branches in Williamsburg.

JSC Gazprom Neft (GZPFY, $20.82) an integrated oil company, engages in the exploration, development, production, and sale of crude oil and gas in the Russian Federation. It also involves in oil refining activities; and the marketing of petroleum products. The company holds 63 subsoil licenses located in 10 regions of the Russian Federation; and engages in joint development projects of oil fields in Serbia, Iraq, Angola, Equatorial Guinea, and Cuba. It also refines crude oil; and acquires, sells, and transports crude oil and refined oil products, such as gasoline, jet fuel, diesel fuel, motor oils, bitumen, and other petroleum products. JSC Gazprom Neft sells its products through its sales network in the Russian Federation, as well as exports to approximately 50 countries worldwide.

Oriental Financial Group Inc. (OFG, $10.57), a financial holding company, provides a range of financial services to mid and high net worth individuals and families, including professionals and owners of small and mid-sized businesses primarily in Puerto Rico. It operates in three segments: Banking, Financial Services, and Treasury.

Valero Energy Corporation (VLO, $20.76) operates as an independent petroleum refining and marketing company. The company operates through three segments: Refining, Retail and Ethanol. Valero Energy Corporation markets its refined products through bulk and rack marketing network; and approximately 5,800 retail and wholesale branded outlets under various brand names comprising Valero, Diamond Shamrock, Shamrock, Ultramar, and Beacon. As of December 31, 2010, it owned and operated 14 petroleum refineries with a combined throughput capacity of approximately 2.6 million barrels per day located in the United States, Canada, and Aruba; and 10 ethanol plants situated in Midwest with a combined production capacity of 1.1 billion gallons per year.
 
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