5 Stocks That Could Still Jump 25 Percent On A Trump Tax Cut

Trump Tax Reform

Stocks are at all time highs three months after President Trump's November victory. As he did on the campaign trail, President Trump continues to peddle tax reform and infrastructure spending. A "phenomenal" tax plan is expected to be released in the coming days and many analysts believe it will include a proposal to reduce the corporate tax rate from 35 to 15 percent.

Seeing that they would benefit most from a tax cut, Wall Street strategists started recommending various stocks with high effective tax rates as soon as Trump took office. Not surprisingly, many companies have seen their share prices reach new highs, including recommendations from Goldman Sachs Group Inc GS such as Charles Schwab SCHW, Quest Diagnostics DGX, and Southwest Airlines LUV.

But are there stocks that are fundamentally undervalued if President Trump does indeed follow through on his "phenomenal" tax reform?

5 Stocks That Could Still Jump 25 percent on a Trump Tax Cut

In order to find stocks that would benefit most from a U.S. corporate tax rate cut, we searched for companies that:

1) Have historically paid an effective tax rate of over 30 percent, and
2) Generate more than 75 percent of total revenues domestically.

Then, using finbox.io's google spreadsheet add-on (scheduled to be released in the next few weeks to all finbox.io members), we filtered through our discounted cash flow (DCF) analyses to find stocks that are still trading below their intrinsic value when the tax rate assumption driving the model is reduced to 15 percent.

Five stocks immediately jumped out: O'Reilly Automotive ORLY, Republic Services RSG, Tractor Supply Company TSCO, Norfolk Southern NSC and Vectren Corporation VVC.

Below is a side-by-side comparison of each company's projected free cash flows when adjusting the tax rate assumption. The left column calculates free cash flows and the resulting fair value when using the company's historical effective tax. The right column does the same but applies a 15 percent rate. Every other assumption driving the models is held constant.

^{Note that the default revenue, EBITDA, capex, etc. projections for each company are Wall Street consensus estimates as of 2/15/17.}

O'Reilly Automotive has nearly 30 percent upside when the company's tax rate is cut from 37 to 15 percent.

Norfolk Southern's tax payments get cut by more than half when implementing Trump tax reform. As shown below, this frees billions of dollars for the company that would otherwise go to Uncle Sam

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^{photo credit: GIIN}