6 Highly Undervalued Stocks With Impressive Profitability

April 20, 2012  |  includes: AFSI, BPI, DFS, ESI, NNI, ZIGO

There are many different ways to look at a company's profitability, so choosing one can be difficult. One idea is to compare profit margins to a company's industry averages.

We ran a screen with this in mind, beginning with highly undervalued stocks. We screened for those that appear undervalued relative to earnings growth and free cash flow, with PEG below 1 and P/FCF below 15.

We then compared these stocks' gross, operating, and pretax profit margins to their industry averages, and we found those beating their industry margins by at least 5% on all three.

Interactive Chart: Press Play to compare changes in market cap over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

Given their strong profitability, do you think these stocks should be trading higher? Use this list as a starting point for your own analysis.

List sorted by PEG.

1. Bridgepoint Education, Inc. (BPI): Provides postsecondary education services. Market cap at $1.12B. Price at $21.35. PEG at 0.39. P/FCF at 6. TTM gross margin at 73.6% vs. industry average at 52.68%. TTM operating margin at 29.33% vs. industry average at 20.42%.TTM pretax margin at 29.63% vs. industry average at 18.05%.

2. Nelnet Inc. (NNI): Focuses on providing fee-based processing services, and education-related products and services in the areas of loan financing, loan servicing, payment processing, and enrollment services. Market cap at $1.17B. Price at $24.46. PEG at 0.45. P/FCF at 4.2. TTM gross margin at 59.99% vs. industry average at 34.57%. TTM operating margin at 57.01% vs. industry average at 31.61%.TTM pretax margin at 32.25% vs. industry average at 25.49%.

3. Discover Financial Services (DFS): Operates as a credit card issuer and electronic payment services company primarily in the United States. Market cap at $17.31B. Price at $32.68. PEG at 0.79. P/FCF at 5.61. TTM gross margin at 50.94% vs. industry average at 34.57%. TTM operating margin at 49.89% vs. industry average at 31.61%.TTM pretax margin at 44.05% vs. industry average at 25.49%.

4. AmTrust Financial Services, Inc. (AFSI): Operates as a multinational specialty property and casualty insurance company in the United States and internationally. Market cap at $1.58B. Price at $26.49. PEG at 0.8. P/FCF at 7.68. TTM gross margin at 20.74% vs. industry average at 14.1%. TTM operating margin at 17.18% vs. industry average at 11.23%.TTM pretax margin at 16.84% vs. industry average at 8.55%.

5. Zygo Corp. (ZIGO): Designs, develops, and manufactures ultra-high precision measurement solutions to enhance its customers' manufacturing yields; and optical sub-systems and components for original equipment manufacturers and end-user applications in the United States and internationally. Market cap at $347.16M. Price at $18.78. PEG at 0.85. P/FCF at 9.82. TTM gross margin at 52.23% vs. industry average at 35.34%. TTM operating margin at 17.1% vs. industry average at 8.97%.TTM pretax margin at 16.32% vs. industry average at 9.36%.

6. ITT Educational Services Inc. (ESI): Offers post-secondary degree programs in the U.S. that provide diplomas as well as associate's, bachelor's, and master's degrees. Market cap at $1.49B. Price at $59.34. PEG at 0.9. P/FCF at 4.16. TTM gross margin at 64.99% vs. industry average at 52.68%. TTM operating margin at 33.81% vs. industry average at 20.42%.TTM pretax margin at 33.88% vs. industry average at 18.05%.

*Profitability data sourced from Fidelity, all other data sourced from Finviz.

By Kapital

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.