In an uncertain macroeconomic environment bred by rising rates, high inflation and the geopolitical climate, the stock market is experiencing one of the worst valuations in decades. As a result, it can be challenging to find undervalued stocks.
This discussion focuses on three stocks with a favorable risk-reward ratio.
The first stock is poised to benefit from the design-win pipeline (5G and Wi-Fi 7 platforms) across handsets, automotive and internet of things. At the same time, the second company has set clear financial priorities that focus on sustaining capital, securing and growing dividends and capital-disciplined growth opportunities. Meanwhile, the third option has a comprehensive business strategy and a forward annual dividend yield of over 3%.
As a result, these three companies present attractive opportunities at current valuations.
Qualcomm
The first company that stands out as an undervalued opportunity is Qualcomm Inc. (QCOM, Financial). With a forward price-earnings ratio of 13.60, significantly lower than the sector median of 21.21, and forward price-to-free cash flow ratio of 11.31, below the sector median of 19.34, the stock is positioned for growth. The semiconductor manufacturer also has a solid return on equity.
Qualcomm's strong growth drivers are rooted in its front-end revenue, making it the leader in handsets. However, the strong design-win pipeline for 5G and Wi-Fi 7 platforms across handsets, automotive and internet of things can also benefit it. Qualcomm's Snapdragon technology, including the Snapdragon 8 Gen 2, is revolutionizing the landscape of flagship smartphones. In addition, it is establishing a new benchmark for connected computing.
In the automotive space, Qualcomm is expanding into two-wheelers and offering the latest infotainment and cloud-connected digital services to enhance safety and deliver a more personal experience for riders. Its solutions enable original equipment manufacturers and fleet providers to offer over-the-air updates, subscription services, remote diagnostics, geofencing, theft protection and more.
In the internet of things space, Qualcomm's next-generation PC platform, with integrated custom Qualcomm Oryon CPUs and an upgraded artificial intelligence engine, has exceeded internal key performance indicators and is engaging with significant PC original equipment manufacturers. The company's Wi-Fi infrastructure and networking products also continue to gain share, led by strength in enterprise Wi-Fi access points and carrier gateways.
Additionally, Qualcomm continues to establish one of the largest ecosystems of manufacturing partners for tracking and logistics. It has also announced a new IoT-optimized modem, the QCX216, for applications such as smart utility meters, trackers, e-mobility, parking meters, home automation, security and other location-based solutions.
Furthermore, with the end of scheduled amortization from the Nokia License and Patent Assignment, Qualcomm is poised to experience a non-cash event to technology licensing revenue and cost of sales, further bolstering its growth potential.
As a result, the company represents a substantial growth opportunity with its innovative technology and expanding reach across multiple industries.
Marathon Petroleum
Next, Marathon Petroleum Corp. (MPC, Financial) is undervalued despite solid financials and a clear commitment to sustainability. The company stands out in the energy sector with a forward price-earnings ratio of 6.66 and an enterprise value-to-forward sales ratio of 0.58, both of which are below the industry average. It also boasts impressive return on assets and return on equity figures. In addition, the stock is offering a forward annual dividend yield of 2.24%.
Notably, more than just Marathon Petroleum's financials make it an attractive investment. The company has set clear 2023 financial priorities focusing on sustaining capital, securing and growing dividends, capital-disciplined growth opportunities and returning capital to shareholders.
Source: Marathon's fourth-quarter 2022 earnings
Marathon Petroleum is also looking to become a leader in sustainable energy, focusing on lowering its carbon footprint. The company has set targets for reducing greenhouse gas, methane and freshwater withdrawal intensity. It has already captured nearly 480,000 metric tons of CO2 from its operations for use in the food and beverage industry as well as industrial applications.
The refining company is also investing in renewable fuel facilities, with a renewable diesel facility in North Dakota and a projected capacity of 730 million gallons per year at its Martinez, California location. Most recently, it acquired a 49.9% interest in LF Bioenergy, an emerging U.S. producer of renewable natural gas, for $50 million, with the potential for an additional $50 million based on predetermined earn-out targets.
Finally, Marathon Petroleum's commitment to sustainability is a vital growth driver. The company has tied 20% of its annual cash bonus program to ESG metrics, including greenhouse gas intensity and process safety events.
Overall, the stock could be an appealing opportunity for investors with a forward-looking focus on sustainability.
United Parcel Service
Finally, United Parcel Service Inc. (UPS, Financial) has a forward price-earnings ratio that is below the sector median at 16.62. It offers a forward annual dividend yield of over 3% with a decisive return on equity.
One of the key growth drivers for UPS is its strong performance in the health care sector, which generated over $9 billion in revenue in 2022 and is expected to surpass $10 billion in 2023. Additionally, the courier and logistics company is investing in improving work-life balance for its employees by updating breakrooms, improving lighting and adding cooling stations. This commitment to employee satisfaction is reflected in the company's improved Net Promoter Score, which has outpaced the competition.
UPS is also making strategic technological investments, such as its Smart Package Smart Facility program, which is set to be deployed in over 900 buildings in 2023. This investment will allow the company to continue delivering industry-leading service. Looking ahead, it has multiple plans to adapt to an uncertain market environment. In its base case, the company expects revenue to increase by low-single digits in the U.S. domestic market and the adjusted operating margin to reach 12%. Internationally, UPS anticipates a revenue decline in the low single digits and an adjusted operating margin of 21%.
Regardless, the company is prepared for a downside scenario where the U.S.'s full-year average daily volume is down 3%. The full-year average daily volume is down by mid-single digits internationally.
Finally, as a testament to its financial strength, UPS has increased its dividend for the 14th consecutive year. It has also authorized a new $5 billion share repurchase program.
Source: UPS's fourth-quarter 2022 earnings
Overall, UPS is well-positioned for long-term growth with its focus on employee satisfaction, customer service and technology.
