Stock Picks: Top Five Large-Caps
TSC Staff
06/18/08 - 10:41 AM EDT
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 above $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.
Hess(HES Quote) is a global independent energy company that explores for, produces, purchases, transports and sells crude oil and natural gas. The company conducts exploration and production activities in countries worldwide, including the U.S, the U.K., Norway, Denmark, Equatorial Guinea, Gabon, Azerbaijan, Thailand and Indonesia. The company also manufactures, purchases, trades and markets refined petroleum and other energy products. Hess operates approximately 1,250 retail facilities in the eastern U.S., along with a convenience store network.
We have rated Hess a buy since August 2004 because of a variety of strengths. Propelled by price increases for natural gas, natural gas liquids and oil, the company's total revenue and nonoperating income for the first quarter of fiscal 2008 rose 45.4% year over year. An increase in the company's average daily production of natural gas and crude oil also contributed to the improvement in total revenue and non-operating income. Hess also announced that its first quarter net income surged to 105.1% to $759 million from $370 million a year ago, again due to higher crude oil prices and increased production. Additionally, net operating income increased significantly in the first quarter, rising 84.03% when compared with the same quarter last year.
While oil prices are currently trading at record levels, 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 significant unexpected downturn in oil prices could negatively affect the company's earnings. Such a downturn could occur if high oil prices generate higher demand for low-cost alternatives or if the slowdown in the U.S. economy and weakness in the U.S. labor market put further pressure on the demand for oil and gas products.
CSX(CSX Quote) owns one of the largest rail networks in the U.S. Its subsidiary, CSX Transportation, provides rail transportation services over a 21,000-mile route network in 23 states, the District of Columbia and the Canadian provinces of Ontario and Quebec. CSX also provides multimodal transportation of domestic highway trailers and containers, and operates a premium parcel business, as well as international steamship containers through CSX Intermodal.
CSX has been rated a buy since September 2004. We are encouraged by the company's strong financial performance in the first quarter of fiscal 2008 and the growth initiatives that should allow the company to gain from positive industry trends. The company reported a 12.0% year-over-year increase in revenue for the first quarter. Net income grew 46.3% to $351.00 million, bolstered by margin expansion and other income.
Gross profit margin in the first quarter increased from 28.41% in the first quarter of 2007 to 31.18%, while operating profit margin also grew year over year to 23%. CSX reported that earnings per share grew from 39 cents a year ago to 48 cents in the most recent quarter.
Finally, CSX has been able to sustain growth amid softening economic conditions and rising inflation by leveraging its diverse business portfolio. The company's growth initiatives during the quarter also included yield management coupled with productivity and safety improvements.
Looking ahead to full-year 2008, management targets earnings per share in the range of $3.40 to $3.60 per share, which would represent an increase of 23.2% to 30.4% year over year. CSX should be able to take advantage of the current increased demand for rail transport caused by tightness in the trucking industry, increased highway congestion, and rising fuel costs. Railroads are also benefitting from the ethanol boom.
Overall, the long-term industry outlook appears hopeful. Bear in mind, however, that CSX's business is cyclical in nature. While the company has done well so far at avoiding problems caused by changing economic conditions, it could still be sensitive to such changes in the future.
Chevron (CVX Quote) is one of the world's largest integrated energy companies. The company is engaged in every aspect of the oil and natural gas industry, with major operations in many important gas and oil producing regions worldwide. Household products, packaging, and fuel additives are made from the chemicals that Chevron produces. Chevron also works in manufacturing, marketing and transportation, along with other interests that include coal mining operations, power generation businesses, worldwide cash management and debt financing activities, corporate administrative functions, insurance operations, real estate activities, and technology companies. Chevron is headquartered in California, and conducts operations in more than 100 countries.
We have rated Chevron a buy since October 2003. This rating is based in part on the company's strong growth in revenue and earnings, as well as its attractive valuation levels. For the first quarter of fiscal 2008, Chevron's revenue rose 39.6% year over year. The company reported a net income of $5.17 billion, or $2.48 per diluted share, compared to $4.72 billion, or $2.18 per diluted share, in the first quarter of fiscal 2007. This represented a 9.6% increase in net income, while earnings per share improved 13.8% when compared with the same quarter one year ago. Additionally, net sales for the quarter were boosted by higher prices for crude oil, natural gas and refined products, growing to $64.66 billion from $46.30 billion a year ago.
The company reported that strong cash flows from operations allowed it to fund major development projects as a foundation for future growth. Bear in mind, however, that the company's performance depends largely on the movements of crude oil and natural gas prices. Any adverse changes in these prices could negatively affect revenue. Furthermore, lower sales volumes and margins on the sale of refined products could also harm the company's bottom line.
Apache(APA Quote) 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, Egypt, the U.K. and the U.S. Apache is also beginning exploration activities in Chile.
The stock has been rated a buy since January 2003 due to such strengths as revenue and net-income growth, solid stock-price performance and an impressive record of EPS improvement. Management reported strong financial results for the first quarter of fiscal 2008, with revenue increasing 57% year over year and net income doubling to $1.02 billion. Earnings per share climbed to $3.03 from $1.47 a year ago. The company's strong earnings growth helped drive Apache's stock price, which is already up by 81% in the past year. Despite this nice gain, we feel that the stock should continue to move higher. Finally, the company recently declared a dividend of 15 cents per share, payable on Aug. 22.
Looking ahead, management expects production to accelerate in the second half of fiscal 2008. It expects the increased activity to occur in the U.S., Argentina and Canada. The company also forecasts long-term production growth to be fueled by the first quarter's exploration successes and the new wells that are planned for drilling in 2008. However, Apache's future performance also depends on its ability to achieve positive results from previous acquisitions. Additionally, the company currently faces challenges from its increasing debt levels and comparatively low shareholder returns.
Union Pacific(UNP Quote) provides rail transportation through its principal operating company, Union Pacific Railroad Company, which runs 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. During the first quarter of fiscal 2008, the company experienced a healthy cash position and improved returns, with cash and cash equivalents soaring 38.3% and assets and return on equity improving due to higher earnings growth. Strong transport demand across all six of the company's freight divisions helped fuel revenue growth of 10.9% year-over-year. At the same time, the company's earnings rose 14.8% to $443 million, or $1.70 per share, aided by price increases and higher fuel surcharges.
Management is confident about Union Pacific's future, despite expecting continued challenges from the soft economy and high diesel fuel prices. However, any failure to counter these issues could affect the company's future prospects. Additionally, Union Pacific's declining margins, higher debt levels and lower liquidity level could hamper its profitability in the future.
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.
