TheStreet.com Ratings

Return to Article

Top 5 Large-Caps for Jan. 7

TSC Ratings

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.

McDonald's(MCD Quote) primarily operates and franchises McDonald's restaurants. We have rated it a buy since March 2004, based on strengths such as its expanding profit margins and growth in net income, revenue and earnings per share.

On Oct. 22, the company reported that global comparable sales growth of 7.1% year over year fueled strong results in the third quarter of fiscal 2008. Revenue increased 6.2% when compared with the prior year's quarter. Although this trailed the industry average of 23.2%, it appears to have led to EPS growth. EPS improved 26.5%, rising from 83 cents in the third quarter of fiscal 2007 to $1.05 in the most recent quarter. Although McDonald's reported earnings have been somewhat volatile recently, we feel that it is poised for EPS growth in the coming year. Net income increased by 11.2% when compared to the same quarter a year ago. In addition, we consider the company's 37.7% gross profit margin to be strong, especially as it has managed to decrease from the same period last year and compares favorably to the industry average of 19%.

Management was pleased with its reported higher margin dollars, comparable sales, and a double-digit operating income increase. The company plans to continue its focus on disciplined financial practices in order to continue driving strong financial performance in the future. Although no company is perfect, we do not currently see any significant weaknesses that are likely to detract from McDonald's generally positive outlook.

Gilead Sciences(GILD Quote) is a biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases worldwide. We it Gilead to a buy in October 2008.

For the third quarter of fiscal 2008, revenue increased 29.5% to $1.4 billion from $1.1 billion a year ago due to higher product sales. Product sales surged 39.1% to $1.3 billion from $961.9 million, driven by strong growth of antiviral product sales (these in turn make up the most significant portion of overall revenue for the company). Royalty revenue plunged 72.4% to $25.2 million from $91 million, hurt by decreased Tamiflu royalties from Roche. Contract and other revenue spiked 29.6% to $7.61 million from $5.9 million a year ago. Margins were squeezed, however, as cost growth outpaced that of revenue. EPS rose from 42 cents in the third quarter of fiscal 2007 to reach 52 cents in the most recent period, an increase of 23.8%.

During the quarter under review, the U.S. Food and Drug Administration granted marketing approval to Viread for the treatment of chronic hepatitis B. The FDA refused to approve the inhaled version of aztreonam lysine and asked the company to conduct another study. Gilead also announced it intends to repurchase $750 million of its shares on an accelerated basis under a $3.00 billion share repurchase program announced in October 2007. Recently, Teva Pharmaceuticals(TEVA Quote) applied to the FDA for permission to make a generic version of Gilead's HIV drug, Truvada. Gilead responded with a patent infringement lawsuit that can halt generic entry for a period of up to 30 months. Investors should be aware that this and other patent-related threats can pose a significant operational risk to the company's prospects, and are always situations that require monitoring. Other risks include any other regulatory or legal affairs, as well as any government policies that are considered unfavorable to drug makers.

Southern(SO Quote) is an Atlanta-based energy company that engages in the generation, transmission, distribution and sale of electricity in the southeast U.S. We have rated it a buy since August 2004 on the strength of its revenue and net income growth.

Despite challenges from the economy and weather, the company reported positive earnings results for the third quarter of fiscal 2008. Its revenue growth of 12.3% year over year slightly outpaced the industry average. Net income growth also increased, rising 3.1% from $772.5 million in the third quarter of fiscal 2007 to $796.6 million in the most recent quarter. Although Southern has had somewhat volatile earnings recently and reported flat earnings for the third quarter, we feel that it is poised for earnings per share growth in the coming year. The company reported that it earned $1.01 per share, excluding the impact of synthetic fuel investments. Its current debt-to-equity ratio is somewhat high at 1.26, but this is still below the industry average, suggesting that its debt level is acceptable within the electric utilities industry.

Management stated that the company remains on track to meet its financial and operational goals for the year. Although the company is currently trading at a premium valuation compared to most other stocks in its industry, we feel that its overall strengths outweigh this slight negative.

Exxon Mobil(XOM Quote) is a publicly traded international oil and gas company. Our buy rating for Exxon Mobil has not changed since January 2004. The company's strong revenue and net income growth, along with a largely solid financial position, have contributed to this rating.

Although results for the third quarter of fiscal 2008 were impacted by Hurricanes Gustav and Ike in the Gulf of Mexico, the company's revenues rose 34.7% year over year in the third quarter of fiscal 2008. Net income rose to a record $14.8 billion, an increase of 57.6% when compared to the same quarter last year. Exxon Mobil also reported significant EPS improvement, continuing a trend of positive EPS growth over the past two years with an increase from $1.70 per share in the third quarter of fiscal 2007 to $2.86 per share in the most recent quarter. One clear sign of strength for this company is the fact that its current return on equity exceeded its ROE from the same quarter one year prior, rising from 33.1% to 39.2%. In addition, the company has a very low debt to equity ratio of 0.1, implying that Exxon Mobil has successfully managed its debt levels. An adequate quick ratio of 1.1 illustrates the company's ability to avoid short-term cash problems.

Management stated that the company was able to deliver strong financial results despite world financial uncertainty in the third quarter. The company plans to continue with plans for disciplined capital investments in the future, staying consistent with previous guidance of about $25 billion for full year capital and exploration expenditures. Fourth quarter earnings are expected to be reduced due to damage repairs and lower volumes across all business lines as a result of Hurricane Gustav and Ike, although the majority of the company's operations are now back on-line or are in the final stages of start-up. It is important to remember that the company's performance largely depends on the movement of crude oil and natural gas prices, and any adverse pricing changes could therefore negatively impact future results.

Apollo Group(APOL Quote) is a global educational services company operating through subsidiaries such as the University of Phoenix, the Institute for Professional Development and the College for Financial Planning. We upgraded our rating on Apollo to a buy in July 2008 based on some notable strengths, such as its robust revenue growth, solid stock price performance, impressive record of earnings per share growth, expanding profit margins and compelling growth in net income.

For the fourth quarter of fiscal 2008, the company reported that its revenue grew by 16.5% year over year, which was above its industry average. This growth appears to have helped boost EPS, which improved significantly from 60 cents a year ago to $1.43 in the most recent quarter. This represents the continuation of a trend of positive EPS growth over the past two years, a trend which we feel should continue. Net income also increased significantly, surging 122.6% when compared to the same quarter a year ago. Apollo reported a slight deterioration in its return on equity, which fell from 64.5% to 57.1%. This can still be construed as a modest strength for the organization, however, as its ROE remains above its industry average.

Management stated that Apollo's enrollment growth surged 15.4% in the quarter, and we can see that its operating margin expanded from 22% in the year-earlier quarter to 23.8% in the most recent period. The company feels confident in its growth prospects, given current enrollment trends and margin expansion opportunities. It continued its acquisitive streak in recent quarters, picking up stakes in universities and expanding its global footprint, which is a trend we believe will continue. The company's operating cash flow is relatively weak by our measures, however, which is an item that bears watching. And though any stock can fall in an overall down market, we feel this stock's prospects remain positive over the near 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.