TheStreet.com Ratings

Return to Article

Top Five Large-Cap Stocks: March 26

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, large-cap stocks are in the spotlight. These are stocks of companies with market capitalizations of over $10 billion that rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 62 factors. In addition, the stocks must be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. The stocks 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.

Apache (APA Quote - Cramer on APA - Stock Picks) is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. The company has interests in Argentina, Australia, Canada, China, Egypt, the U.K. and the U.S.

Apache has been rated a buy since January 2003. Fueled by record energy prices and an 8.0% jump in production, the company's earnings for the fourth quarter more than doubled year over year. Net income rose to $1.07 billion, or $3.19 a share, vs. $520.8 million, or $1.56 share, a year ago. Apache's total revenue surged 53% to $3.01 billion from $1.97 billion, driven by record production and strong commodity prices.

Looking forward to 2008, the company anticipates an earnings contribution from rising natural gas prices in Australia on growing demand in the domestic mining industry and in the liquefied natural gas export market. Apache's future performance depends, however, on its ability to achieve positive results from previous acquisitions. The company also faces challenges from increasing debt levels and comparatively low shareholder returns.

Devon (DVN Quote - Cramer on DVN - Stock Picks) is an independent energy company that explores for oil and gas. The company also processes natural gas and develops, produces and transports oil, gas and natural gas liquids (NGLs). Additionally, the company has midstream operations constructing and operating pipelines, storage and treating facilities and gas processing plants. Devon's oil and gas properties are primarily in the U.S. and Canada, but the company also owns some properties in Azerbaijan, Brazil, China and Russia.

Our buy rating for Devon has not changed since September 2004. Our rating is based on strong growth in revenue and net income, which are further supported by higher realized oil and natural gas liquids prices, rising production volumes, key divestitures and sound cash levels. Total revenue for the fourth quarter of 2007 surged 32% year over year to $3.2 billion, as the oil and natural gas liquids segments saw strong performance. Net income more than doubled to $1.32 billion, or $2.45 per share, vs. $582 million, or $1.11 per share, in the fourth quarter of 2006. The company's oil and natural gas liquids production grew 12% and 19%, respectively. This aided the company's fourth-quarter performance, as did increases in the price for natural gas liquids and the realized oil price.

The company is currently making strategic divestitures that we feel help support our buy rating. Devon completed the sale of its operations in Egypt for an adjusted sales price of $341 million. In November 2007, the company announced an agreement to sell its operations in Gabon and is in the process of divesting its remaining assets and terminating all of its operations in West Africa.

Devon's future performance will be highly influenced by commodity prices. Any volatility in energy prices could affect the company's profitability and growth rates. The company also faces challenges from an increase in its debt level and a decline in return on equity, which could affect the company's growth going forward.

XTO Energy (XTO Quote - Cramer on XTO - Stock Picks) acquires, develops, exploits and explores oil and gas properties. The company also produces, processes, markets and transports oil and natural gas. XTO's proved reserves are located primarily in various regions of Alaska, Arkansas, Colorado, Kansas, New Mexico, Oklahoma, Texas and Wyoming. These fields are generally long-lived, with well-established production histories.

We have rated XTO Energy a buy since November 2001. We see its strengths in areas such as revenue growth, stock performance and increase in net income. For the fourth quarter of 2007, the company reported that its net income rose 8.2%, boosted by increased oil and natural gas production as well as higher energy prices. Net income increased to $464 million, or 95 cents a share, from $429 million, or 92 cents a share, a year ago. Revenue rose 33% to $1.59 billion, vs. $1.2 billion in the fourth quarter of 2006. Finally, XTO Energy witnessed record production led by broad-based growth across all basins.

The company recently agreed to acquire $1 billion worth of oil and gas properties, which could help it reach significantly higher production and reserve targets. Looking ahead, the company raised its 2008 production growth target to 20%, up from its previous target of 18%. Bear in mind, however, that there are risks to our buy rating in that oil and gas prices are highly volatile and cyclical in nature.

Hess (HES Quote - Cramer on HES - Stock Picks) 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 cost 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 the demand for oil and gas products.

Murphy Oil (MUR Quote - Cramer on MUR - Stock Picks) explores for and produces crude oil, natural gas and natural gas liquids worldwide, with 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 largely solid financial position. For the fourth quarter, the company reported year-over-year revenue growth of 68%, and net income more than doubled. The company attributed the increase to 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 earnings. 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.

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 affect 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: XTO operates in the oil and gas industry, and some of the other stocks in its field include BP(BP Quote - Cramer on BP - Stock Picks), Exxon Mobil(XOM Quote - Cramer on XOM - Stock Picks) and ConocoPhillips(COP Quote - Cramer on COP - Stock Picks). These stocks were recently trading at ($61.19, -0.91%), ($85.34, +0.16%) and ($75.10, +0.76%), respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.