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Top Five All-Around Value Stocks: March 25

TheStreet.com Ratings Staff

Each business day, TheStreet.com Ratings compiles a list of the top five stocks in five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- and publishes these lists in the Ratings section of our Web site.

This list is based on data from the close of the previous trading session. Today, all-around-value stocks are in the spotlight. These are stocks of companies that meet a number of criteria, including annual revenue of more than $500 million, lower-than-average valuations such as a price-to-sales ratio of less than 2, and leverage that is less than 49% of total capital.

In addition, they must rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors. The stocks must also be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. They are ordered by their potential to appreciate.

Note that no provision is made for off-balance-sheet assets such as unrealized appreciation/depreciation of investments, market value of real estate or contingent liabilities that might affect book value. This could be material for some companies with large, underfunded pension plans.

Hess HES explores for, produces, purchases, transports and sells crude oil and natural gas. The company conducts exploration and production in Algeria, Denmark, Norway, Malaysia, the U.K. and the U.S. The company also manufactures, purchases, trades and markets refined petroleum and other energy products.

Hess has been rated a buy since August 2004. The company displayed excellent performance in the fourth quarter of 2007 on the back of rising production and pricing trends because of successful exploration and development activities. Hess' revenue increased 32% year over year to $9.46 billion. Net income increased 42%, mainly because of lower operating costs and lower taxes. We believe Hess can leverage its strong fundamentals to benefit from the pricing trend in the future.

While oil prices are currently trading at a record level, these prices are also highly volatile and cyclical in nature. Because Hess generates a significant portion of its income from the production of oil and gas, any unexpected sharp downturn in oil prices could negatively affect the company's earnings. Such a downturn could occur if high oil prices generate demand for low-cost alternatives or if the slowdown in the U.S. economy and weakness in the U.S. labor market put pressure on demand for oil and gas products.

Murphy Oil MUR explores for and produces crude oil, natural gas and natural gas liquids worldwide. It has refining and marketing businesses in North Africa and the U.K. In the U.S., Murphy produces oil and natural gas from six fields operated by the company and three operated by others. The stock has been rated buy since January 2006.

Murphy Oil's strengths include its revenue growth, solid stock performance and a solid financial position. For the fourth quarter, revenue increased 68% year over year and net income more than doubled. The company attributed the increase to both higher product prices and increased production volumes, which overcame weakness in its refining results. While Murphy Oil's 46% one-year stock price increase makes it expensive compared to historical valuation levels, we feel that the company's strengths justify the move.

It is important to remember that any unexpected sharp downturn in oil and gas prices could negatively affect the earnings of the company. In addition, oil prices, which are highly volatile and cyclical in nature, are trading at a record level, and could be vulnerable to weaker economic conditions. High prices may also create demand for low cost alternatives, and could thus hurt overall demand for oil and gas products.

Nucor NUE manufactures steel products and is also one of the nation's largest recyclers of scrap metal. The company has facilities in 13 states. Nucor operates in two segments: steel mills and steel products. The steel mills segment produces both hot-rolled steel manufactured from scrap and cold-rolled steel made by further processing hot-rolled steel. The steel products segment produces steel joists and joist girders, steel deck, cold-finished steel, steel fasteners, metal building systems and light-gauge steel framing.

Our buy rating for Nucor has not changed since March 2004. We are encouraged by recent acquisitions and the company's ability to continuously maintain higher-than-average shareholder returns. During fiscal 2007, Nucor completed major acquisitions to foster product diversification and maintain a competitive edge. Recently, it acquired Nelson Steel, a producer of wire mesh and related products.

In addition, Nucor's subsidiary, Harris Steel, completed acquisitions of three companies, increasing its annual rebar fabrication capacity. Nucor also signed an agreement with Duferco Group to establish a 50-50 joint venture for the production of beams in Italy. These acquisitions and ventures should have an immediate positive impact on earnings.

As for shareholder returns, Nucor's return on equity increased to 29% at the end of the fourth quarter of 2007. During the fiscal year, the company repurchased approximately 14.1 million shares at a cost of $754 million, and still has 30.0 million shares to be repurchased under the current authorization. This should help support ROE going forward.

According to the International Iron and Steel Institute, global demand for steel is expected to rise 6.8% in 2008, and this positive industry trend should benefit Nucor. Bear in mind, however, that any increases in scrap steel costs could negatively impact the company's margins and profitability, as could weak demand from the automotive and housing sectors.

Freeport-McMoRan FCX explores for, develops, mines and processes ore containing copper, gold and silver in Indonesia, North America, South America and Africa. The company also smelts and refines copper concentrates in Spain and Indonesia. Its principal asset is the Grasberg minerals district, which it discovered in 1988.

We have rated Freeport-McMoRan a buy since January 2005. We believe the company's high reserve base and increased production activities could support improved performance in the near term. As of December 2007, Freeport-McMoRan had total recoverable reserves of 93.2 billion pounds of copper, 41 million ounces of gold, and 2 billion pounds of molybdenum. The company has significant development activities under way to expand copper production capacity, extend mine lives and develop large-scale underground ore bodies. For the fourth quarter of 2007, Freeport-McMoRan reported an increase in revenue to $4.18 billion from $1.64 billion in the fourth quarter of 2006. Net income also increased, rising from $441.6 million to $478 million.

The metals and mining industry has recorded steady growth in commodity demand over the past few years, resulting in price increases. The price of gold has been boosted by increased investment demand, ongoing geopolitical tensions, a weak U.S. dollar and inflationary pressures. Increases in wealth in emerging economies like China and India could further increase global demand for gold. The long-term outlook for China also remains strong.

However, there is the risk of an inventory pileup and a price decrease should there be any unexpected slowdown in copper demand. Such a decrease, when coupled with higher costs of consumables and energy, could pressure Freeport-McMoRan's operating margin and impact its profitability.

Union Pacific UNP provides rail transportation through its principal operating company, Union Pacific Railroad Company, which is the largest railroad in North America. The railroad covers 23 states across the western two-thirds of the U.S. and ships products such as automobiles and automobile parts, agricultural products, coal, liquid and dry chemicals, plastics and liquid petroleum products.

Union Pacific has been rated a buy since February 2005. Despite economic softness and adverse weather conditions, the company recorded 5.9% year-over-year growth in its top line for the fourth quarter of 2007. For full-year 2007, revenue increased 4.5% to $16.28 billion year on year. Net income grew at a higher rate of 16% to $1.86 billion, bolstered by margin expansion and partially offset by higher interest expense and taxes. To combat rising fuel prices, the company deployed new technology, acquired environmentally friendly switch locomotives and implemented operational changes to improve fuel efficiency.

Union Pacific's efforts to improve customer satisfaction and maintain a diversified book of business place it in an advantageous position compared with competitors. Furthermore, the company hopes to gain from expected strong railroad pricing in the year ahead by adding many more unit trains in the Southeast and Southwest regions, which are expected to be growth areas this year due to the ethanol boom in these regions.

There is risk to the buy rating, however. Union Pacific's business is cyclical and susceptible to changes in economic conditions and could be adversely affected by severe weather conditions, currency volatility and higher-than-expected fuel prices.

Our quantitative rating is based on a variety of historical fundamental and pricing data and represents our opinion of a stock's risk-adjusted performance relative to other stocks.

However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could impact the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.

For those reasons, we believe a rating alone cannot tell the whole story, and should be part of an investor's overall research.

Know What You Own: UNP operates in the railroad sector, and some of the other stocks in its field include Norfolk SouthernNSC, Canadian National RailwayCNI and CSXCSX. These stocks were recently trading at ($54.62, +0.52%), ($49.32, +2.24%) and ($56.78, +1.28%), respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.