Top Five All-Around Value Stocks

Nucor, Berkshire Hathaway, Hess, Northrop Grumman and Hewlett-Packard are all on top.
By TheStreet 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.

Nucor

(NUE) - Get Report

manufactures steel products and is also one of the nation's largest recyclers of scrap metal. The company has facilities in 13 states and operates in two segments: steel mills and steel products. The steel mills segment produces both hot-rolled steel, which is 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. For the first quarter of 2008, revenue rose 32% year over year to $4.97 billion. This increase was attributed to a 15% increase in average steel sales price per ton, an 11% increase in average steel products sales price per ton and a significant increase in steel products shipments driven by acquisitions made in 2007. These factors and strong global demand for steel also contributed to a 7.5% increase in first-quarter net income, less than the rise in revenue that was due to higher scrap steel costs.

Earnings per share rose as well, due to Nucor's fiscal 2007 stock repurchases. The company continued its acquisition strategy in the first quarter, acquiring scrap processor David J. Joseph Co. in February. Nucor also recently bought Galamba Metals Group, which operates 16 scrap-processing facilities, and Metal Recycling Services. Finally, the company increased its base quarterly cash divided to 32 cents from 30 cents a share and approved the payment of a supplemental dividend of 20 cents a share.

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. Looking forward to the second quarter of 2008, the company anticipates earnings in the range of $1.55 to $1.60 a share. Bear in mind, however, that any increases in scrap steel costs could negatively affect margins and profitability, as could weak demand from the automotive and housing sectors.

Berkshire Hathaway

(BRK.B) - Get Report

is a holding company whose insurance and reinsurance activities are conducted through more than 60 domestic and foreign-based insurance companies. Additionally, the company's subsidiaries write property and casualty insurance, sell building products and architectural coatings, supply connector products and engineering software, manufacture apparel and aircraft, provide high-technology training for aircraft, and operate utility and energy businesses.

Berkshire Hathaway has been rated a buy since April 2003. The company's strengths can be seen in multiple areas, such as revenue growth and solid stock-price performance. Revenue rose 6.9% year over year for the fourth quarter of fiscal 2007. Overall, the company's 76 operating businesses performed well, although businesses linked to the housing market faced challenges. Berkshire Hathaway moved to diversify its business during the fourth quarter by creating Berkshire Hathaway Assurance to guarantee municipal bonds. For fiscal 2007, the company earned $13.21 billion, which represents an increase of 20% compared with fiscal 2006 results. Total revenue for the full year also grew 20% to $118.24 billion.

Looking forward, even the best stocks can fall in an overall down market, but in any other environment, this stock still has good upside potential despite its rise in the past year.

Hess

(HES) - Get Report

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

We have rated Hess 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 continue to benefit from the current pricing trend.

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.

Northrop Grumman

(NOC) - Get Report

is a global defense and technology company. Serving government and commercial customers worldwide, it provides technologically advanced products, services and solutions in information and services, aerospace, electronics and shipbuilding. The company serves as prime contractor, principal subcontractor, partner, or preferred supplier when participating in high-priority defense and nondefense technology programs in the U.S. Northrop Grumman also conducts business with foreign governments and sells its commercial products and services both domestically and internationally.

Northrop Grumman has been rated buy since May 2004. The company recorded revenue growth of 10% year over year for the fourth quarter of 2007, driven primarily by robust growth in the Information and Services, Electronics and Ships segments. Net income increased from $453 million in the fourth quarter of 2006 to $454 million, and earnings per share climbed to $1.32 from $1.29. Net operating cash flow also rose significantly. We feel that these strengths outweigh the company's low profit margins.

Earlier in 2007, Northrop Grumman acquired Essex Corporation, which strengthened the company's capabilities and participation in the rapidly growing Intelligence business. The recent acquisitions of Scaled Composites and Xinetics are expected to complement the earlier acquisition and translate into meaningful revenue growth in fiscal 2008. The company also expects to benefit from the 2008 defense budget, and is therefore optimistic about its future financial performance.

Management expects full-year 2008 revenue of $33 billion from organic growth alone, with earnings expected to be in the range of $5.50 to $5.75 per share. It is important to remember, however, that Northrop Grumman's business is highly cyclical and extremely dependent on government spending.

Hewlett-Packard

(HPQ) - Get Report

provides products, technologies, solutions and services to individual consumers and businesses worldwide. The company's offerings include enterprise storage and servers, personal computing, multi-vendor services and imaging and printing. Hewlett-Packard's Personal Systems Group segment produces, among other products, commercial and consumer PCs based predominantly on the Windows operating system. These products use

Intel

(INTC) - Get Report

and

AMD

(AMD) - Get Report

processors.

Our buy rating for Hewlett-Packard has not changed since November 2004. This rating is based on the company's robust top-line and bottom-line growth, margin expansion and attractive returns. Hewlett-Packard's total revenue for the first quarter of fiscal 2008 grew 14% year over year, aided by surging laptop sales and continued demand for printer ink. Cost control measures and lower component costs helped the company to improve gross profit margin and operating margin 91 basis points and 140 basis points, respectively, from the year-ago quarter. Gross profit margin was reported as 26.38%, while operating margin was 9.21%. Hewlett-Packard also reported improved returns, with return on assets increasing to 8.9% from 8% and the return on equity rising to 21% from 17%.

For fiscal 2008, Hewlett-Packard raised its guidance based on anticipated cost reductions and gain in market share. The company expects revenue to range between $27.7 billion and $27.9 billion for the second quarter of fiscal 2008. However, despite rising revenue and earnings, the company faces challenges from rising debt levels and stiff competition. Additionally, exposure to emerging markets is forcing the company to lower its prices in order to protect market share.

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.

This article was written by a staff member of TheStreet.com Ratings.

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