Are you worried that the ASX's largest companies are over-valued? If not, maybe you should be. The average P/E ratio for stocks in the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) is nearly 22 today, versus a historical average of around 15.
Still, value investors can still find opportunities in the market and even within the ASX 200. Here are all the details on one such idea.
A value play with a hefty yield
Consider GUD Holdings (ASX: GUD), which is not only cheap but boasts a hefty dividend yield in the 8.5% range, fully franked.
The company imports and sells white goods to Aussie consumers under brand names including Sunbeam. The company also has an industrial parts segment –nearly as large, judging by sales, but not nearly as profitable, judging by margins — as its consumer segment. A smaller automotive parts segment and a water products segment together account for the remaining 30% of revenues.
Over the last ten years, GUD Holdings' sales have grown from $373 million in 2003 to $611 million in 2012. Net income has risen even faster, from about $22 million to $88 million. And over the same period, GUD shares have risen 82%, outperforming the overall S&P/ASX 200 index by about 13 percentage points.
So why are shares so cheap?
Yet Mr. Market hates this company. Today, GUD shares are trading for less than six times earnings: In other words, at a huge discount to other ASX 200 companies.
There are a couple of reasons for this. First, GUD's highly profitable consumer products business is under pressure from several different directions. Cheap house-brand white goods are cutting into the market share of brands like Sunbeam. What's more, GUD Holdings depends on retailers like Woolworths (ASX: WOW) and Wesfarmers (ASX: WES), operator of Kmart and Target stores, to stock its products and help it to maintain its fat margins. Yet both these companies are famous for wresting control away from suppliers like GUD Holdings.
Third, GUD Holdings is losing a key member of its executive team soon. Chief executive Ian Campbell is set to leave the company in July of this year.
That's the bad news. Now, the good news…
The good news is, the fear and pessimism seem already well baked into the company's share price, and the high dividend yield could offer investors significant downside protection. In terms of dirt-cheap income plays in the ASX 200, it doesn't get much better than GUD.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Catherine Baab-Muguira does not own shares in any of the companies mentioned in this article.
