Markets worldwide are down of late and Australia is no exception. The S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is dipping, with a drop of around 5% in the last month. It would seem that the dip has been caused by falling markets in the United States, where stocks were more richly valued after a strong run. This, in turn, might be traced back to tapering and the havoc that caused in some emerging economies, as well as concerns about China’s shadow banking sector. However, what’s clear is that the companies listed on the ASX aren’t suddenly losing their value. Rather, market participants have suddenly decided they are more inclined to sell than buy. With that in mind, here are some top companies to buy at good prices.
Coca-Cola Amatil Ltd (ASX: CCL)
Coca-Cola Amatil’s fruit canning subsidiary SPC Armoda has put the company on the front page lately, with Coca-Cola Amatil unable to win government support for its business. Coca-Cola Amatil shareholders might wonder why they don’t get government support, given large subsidies to mining, but ought not get distracted by what is in essence a minor issue for the company.
Either way, management is doing the right thing by sticking to its guns, and SPC Armoda is far from the main game for the Australian licensee of the iconic Coca-Cola brand. Coca-Cola Amatil has just re-entered beer distribution, and the company’s purchase of the right to distribute the ridiculously sweet, flavoursome and popular Rekorderlig Cider brand shows that they are, as ever, on trend. Expansion into Indonesia also looks promising.
Average cashflow over the last five years was 83 cents per share, and I’m confident average cashflow over the next five years will be a substantial increase on that, despite the poor results expected in FY 2013. The company’s share price dropped 2.5% yesterday to close at $11.41, just over 15.5 times FY 2012 earnings.
In the last 10 years, the lowest average annual P/E ratio for Coca-Cola Amatil has been 15.5. A share price of $11 would be attractive to me, because it would represent about 13.25 times average cashflow for the last five years and a historically low trailing P/E ratio. The company’s pricing power and economies of scale give it a substantial business moat, and I expect over the long term, it will continue to grow. Perhaps the most famous fan of the Coca-Cola brand (at least, investing in it) is Warren Buffett. You can be sure he wouldn’t be too worried about the falling share price when the fundamental economics of the business remain so strong.
ResMed Inc. (ASX: RMD)
Medical device manufacturer ResMed dropped 4% yesterday, due to a combination of factors. First of all, it’s listed in the USA, so is subject to their sell-off and our sell-off. Second, the company’s recent results failed to live up to analysts’ unrealistic expectations. One potential problem for ResMed is that low-cost competitors exist, and the company’s high margins will be viewed with a sceptical eye by investors, as high margins across the board are expected to revert to mean in coming years.
ResMed’s devices are used to treat sleep-apnoea, a condition that is related to obesity and old age. I covered the company recently, and I believe investing is a decent way for Australian investors to gain exposure to the US dollar. The company has a huge addressable market, is dominant in its field, yields a 2% dividend and has more than enough cash. I’d find it difficult to resist buying shares at $4.50.
Tamawood Limited (ASX: TWD)
Tamawood’s core business is home construction. The company assists affiliated and franchisee builders with sales, soil tests, surveys, drafting, costing, purchasing and project management. Generally, homes are sold before they are constructed. Arguably, rising house prices will trigger increased demand for new homes. In 2006, the director, founder and major shareholder, Lev Mizikovsky, received just $70,000 per year by way of salary as the then Managing Director. This demonstrates his respectful attitude towards shareholders. I believe he is still highly influential within the company.
The balance sheet isn’t particularly strong, but the company does have $3 million in cash, which should prove more than adequate, as the business isn’t particularly capital intensive. I am anticipating a drop in earnings in the near term, due to the loss of income previously derived from opportunistic purchases of distressed land a few years ago. Combined with a potential bear market, this could create an excellent opportunity for long-term investors. I’d consider buying shares below $2.50 and would find it very difficult to resist buying below $2. The company trades on a trailing yield of 7.5%, although this is only sustainable due to dividend reinvestment by major shareholders.
Coca-Cola Amatil provides exposure to the consumption of fizzy drinks and alcohol, demand for which remains steady, even during a recession. Tamawood provides exposure to home construction, which is slated to increase, as the shortage of housing becomes a bigger problem. Meanwhile, ResMed provides a hedge against a falling Australian dollar and benefits from the ageing population and growing obesity epidemic. Better yet, all three companies pay dividends to shareholders, providing comfort (and income) to investors, when the market falls.