By Guest Columnist Ranjit Thomas

In the depressed market these days, dirt-cheap stocks don't seem hard to find. Finding dirt-cheap stocks of companies that deal with dirt -- now that may seem like a challenge.

I went looking for fundamentally sound companies in industries that have something to do with Mother Earth and whose stocks have been unfairly beaten down. I found five: earth-moving (and other) equipment renter United Rentals (URI), fertilizer companies CF Industries (CF) and Terra Industries (TRA), mining equipment maker Joy Global (JOYG) and copper miner Freeport-McMoRan (FCX).

I will write about three of these, leaving out CF, whose thesis is similar to Terra's, and Freeport, because much is already known about this $25 billion company.

United Rentals: United Rentals is an equipment-rental company that primarily rents out construction and industrial equipment. This isn't the best of times for such a business, but United Rentals is largely stable. While new construction has slowed down, maintenance work and industrial activity is holding up.

The company is expected to earn $3.08 per share this year, vs. $2.70 last year. Free cash flow is running at about $4 per share, with deferred tax and payables providing a boost above net income. The company has about $3 billion of debt but can comfortably cover the interest expense and is using its cash flow to gradually repay debt. At a recent share price of $15, the stock is trading at just five times EPS and four times FCF.

The company received an offer to be acquired by the private equity firm Cerberus last year for $34.50 per share. However, with the deterioration in the credit markets, Cerberus backed out of the deal. As a consolation to shareholders, a few months ago, the company spent $600 million to buy back about a quarter of its outstanding (diluted) shares for $22 per share in a modified Dutch auction. With the stock now trading at $15, clearly this wasn't a smart thing to do. The company would have been much better off gradually buying its stock in the market. This quarter, the company is focused on using its cash flow to repay some high-interest debt. I expect it to initiate another share buyback in the fourth quarter, which should be highly accretive to earnings.

I believe the stock is worth a 10 times EPS multiple for a $30 value, which is what it was trading at a year ago. That's a nice potential 100% return.

Terra Industries: Terra Industries is a multi-billion-dollar fertilizer company, but it's much smaller than the better known names in the industry, such as Mosaic (MOS) and Potash (POT). Terra primarily manufactures nitrogen-based fertilizer.

Fertilizer companies have seen their earnings soar in recent years, and there is concern that the good times are about to end. I think this concern is misplaced and that earnings should continue to be robust. On the demand side, there is no let up in the shifting of diets in large parts of the world towards meat, which requires feed in the form of corn and soybeans. Corn-based ethanol has also been a driver, with the high price of oil and the focus on renewables. The major raw material input in the making of nitrogen-based fertilizers is natural gas, whose price has come down substantially in the last few months. Also, there have been major discoveries of natural gas deposits in the continental U.S. in shale rock. There have been a lot of news reports devoted to the Fayetteville, Marcellus and Haynesville shale plays. These assure an increasing supply of natural gas at reasonable prices in the U.S. Natural gas is hard to transport and expensive to store. Thus, these increasing supplies are likely to be beneficial to a U.S.-based user such as Terra.

The company is expected to earn $6.63 per share this year, vs. $2.39 last year. Free cash flow is tracking earnings. At a recent share price of $38, the stock is trading at just six times EPS and FCF. The company is buying back stock, which is accretive to earnings.

The stock, however, is quite volatile and not for the faint of heart. It tends to move in tandem with the commodity complex, which has exhibited a lot of volatility (along with a downward trend) of late. One interesting aside is that the stock price is positively correlated with the price of natural gas. One would logically expect a negative correlation as natural gas is a major input. It looks as though investors move in and out of all commodities and commodity-related stocks at the same time.

I believe the stock is worth an 11 times EPS multiple for a $73 value. That's a not-too-shabby potential 90% return.

Joy Global: Joy Global manufactures underground and surface mining equipment for the extraction of coal, minerals and ores. The business is essentially a duopoly, with Bucyrus International (BUCY) being the company's main competitor.

The company came out with its earnings report in early September, and investors were disappointed that the company's operating margin came in lower than expected. They sent its stock down almost 20% that day. It didn't help that this was a time when the market was declining, and investors were trampling over each other to get out of commodity-related stocks. After a further 15% drop in the share price to the $45 level, management fired back, doubling its $1billion share-buyback program. The stock has since recovered to about $51.

The company is expected to earn $3.66 per share this year, an approximate 30% improvement over last year. (The company has a fiscal year ending in October, so I am using figures for the 12 months ending next January.) Free cash flow is more than earnings, thanks to advance payments from eager customers. At a recent share price of $51, the stock is trading at 14 times EPS and 12 times FCF.

Even if the demand for commodities declines from current levels, I believe that the company can continue to succeed in the marketplace. The easy-to-access stuff has been dug out from the ground; now miners and oil explorers have to turn to the harder-to-extract deposits. The Canadian oil sands and Appalachian coal mines aren't going to stop production any time soon.

Considering the fact that the company can sustain a growth rate of about 20% in the medium term, I believe the stock is worth a 20 times EPS multiple for a $73 value, which is where it was trading a month ago. That's a potential 40% return with low risk.

Disclosure: The author has long positions in URI, TRA and JOYG.

Posted on Sept. 25, 2008