STOCK PICKS: Top 5 Large-Caps for July 9
TheStreet.com Ratings Staff
07/09/08 - 07:29 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 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.
Murphy Oil(MUR Quote - Cramer on MUR - Stock Picks) is a worldwide oil and gas exploration and production company. The company is headquartered in El Dorado, Ark. Murphy 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. Murphy also conducts exploration and production operations in Canada, Malaysia, Ecuador and the U.K.
Murphy Oil has been rated a buy since March 2003. The company's strengths include its healthy growth in net income and revenue, solid stock performance and impressive record of earnings per share growth. For the fourth quarter, the company reported year-over-year revenue growth of 90.6%, and net income increased by 269.7%. The growth in net income was driven by higher crude oil prices and sales volume, while higher natural gas prices and an increase in the average daily production of natural gas and crude oil contributed to the improved revenue. The company reported significant earnings per share (EPS) growth to $2.14 from 58 cents a year ago, continuing its pattern of positive EPS growth over the past two years. Additionally, Murphy Oil's stock price has surged 47.46% over the past year.
It is important to remember that any unexpected sharp downturn in oil and gas prices could negatively affect Murphy Oil's earnings. In addition, oil prices, which are highly volatile and cyclical in nature, are trading at record levels and could be vulnerable to weaker economic conditions. High prices may also create heightened demand for low-cost alternatives, and could thus hurt overall demand for oil and gas products.
Questar(STR Quote - Cramer on STR - Stock Picks) is a natural gas-focused energy company. The company has four major lines of business: gas and oil exploration and production, midstream field services, interstate gas transportation and retail gas distribution. These businesses are conducted through three main subsidiaries: Questar Market Resources, Questar Pipeline Co. and Questar Gas Co. The company operates in the Rocky Mountain and Midcontinent regions of the U.S. These regions include parts of Wyoming, Utah, Colorado, Oklahoma, Texas and Louisiana.
We have rated Questar a buy since October 2002. Strengths such as revenue growth and improvement in earnings have contributed to this rating. For the first quarter of fiscal 2008, Questar reported a 23% surge in net earnings, boosted by higher natural gas and oil production. Increased prices also contributed to the rise. Net income rose to $185.8 million, or $1.05 per share, from $151.1 million, or 86 cents a share, in the first quarter of fiscal 2007. Total revenue grew 20% to $1.05 billion, compared with $872.1 million a year ago. Additionally, Questar Exploration and Production Company, a subsidiary of Questar Market Resources, completed the purchase of two producing properties in northwest Louisiana during the first quarter.
Looking ahead to the rest of fiscal 2008, Questar increased its EPS forecast to a range of $3.25 to $3.40 a share from previous guidance of $3.05 to $3.20 a share. The company also raised its production forecasts for the full year. However, any significant decline in natural gas and oil prices could affect the company's business severely, as could any unfavorable regulatory actions.
Hess(HES Quote - Cramer on HES - Stock Picks) 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 due to a variety of strengths. Propelled by price increases for natural gas, natural gas liquids, and oil, the company's total revenue and non-operating 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 to 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.
Smith International(SII Quote - Cramer on SII - Stock Picks) is a worldwide supplier of products and services to the oil and gas exploration and production industry, the petrochemical industry, and other industrial markets. Smith provides a comprehensive line of technologically-advanced products and engineering services, including drilling and completion fluid systems, waste-management services, three-cone and diamond drill bits, drilling tools, and liner hangers. The company also offers supply-chain management solutions. Smith markets its products and services through subsidiaries, joint ventures, and sales agents located in nearly all the petroleum-producing areas of the world.
We have rated Smith a buy since May 2006. Various strengths, such as growth in net income and revenue, contributed to this rating. For the first quarter of fiscal 2008, the company's earnings grew 9.3% year-over-year, propelled by improved earnings from the Oilfield segment. Net income was $174.99 million, or 87 cents per share, compared to $160.16 million, or 80 cents per share, in the first quarter of fiscal 2007. Revenue for the first quarter grew 12.5% year-over-year to $2.37 billion due to a rise in the Oilfield segment's business volumes. A quarterly dividend of 12 cents per share was paid in April 2008, representing a 20% increase in Smith's quarterly dividend.
Management believes that customers and shareholders will see significant value from an upcoming 50/50 joint venture with Integra Group to supply downhole oilfield services and engineering solutions in Russia and other countries of the Commonwealth of Independent States. The joint venture is expected to close during the third quarter of fiscal 2008. Additionally, management is encouraged by the strength shown by the non-North American market and therefore expects earnings for fiscal 2008 to be in the range of $3.70 to $3.80 per share. However, Smith's future performance is dependent on the level of oil and natural gas exploration and development activities, and could be negatively impacted by disruptions in global business and economic conditions.
Diamond Offshore Drilling(DO Quote - Cramer on DO - Stock Picks) engages in the contract drilling of oil and gas wells. The company's fleet of 30 submersibles enables it to offer a range of services in various markets worldwide, including the deep water, harsh environment, and conventional semisubmersible markets. Diamond also owns 13 jack-up rigs, which are mobile, self-elevating drilling platforms equipped with legs that are lowered to the ocean floor until a foundation can be built to support the platform. Finally, Diamond also has one drillship, the Ocean Clipper, located offshore Brazil.
We have rated Diamond a buy since June 2005, on the basis of various strengths displayed by the company. Boosted by solid sales growth from its contract drilling business segment, Diamond's revenue surged 29.3% year-over-year to $666.70 million in the first quarter of fiscal 2008. First quarter earnings rose 29.7%, fueled by a rise in daily rates for the company's deepwater rigs. Net income for the quarter increased to $290.63 million, or $2.09 per share, from $224.15 million, or $1.64 per share, in the first quarter of fiscal 2007. In keeping with its policy of considering the payment of special cash dividends on a quarterly basis, the board of directors recently declared a special cash dividend of $1.25 per share of common stock in addition to a regular cash dividend of 12.5 cents per share of common stock. Both dividends are payable in June 2008. Finally, Diamond's debt-to-equity ratio is very low at 0.17, implying that debt levels have been successfully managed.
While lower than a year ago, Diamond's gross profit margin continued to remain relatively high at 61.80%. However, the company's net profit margin of 37.00% significantly outperformed against the industry. Furthermore, the company has demonstrated a pattern of positive earnings per share growth over the past two years, and we feel that this trend could continue. Although the company may harbor some minor weaknesses, we feel that they are unlikely to offset the company's strengths. Instead, we feel that the slowdown in the U.S. economy and weak job data pose larger risks as they may put pressure on the demand for oil and gas. This could in turn disturb activities related to exploration and production, affecting the number of rigs that are operational in the market and potentially affecting Diamond's future profitability.
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.
