Top Five Large-Cap Stocks

L-3, Apache, CSX, XTO Energy and Murphy Oil 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, large-cap stocks are in the spotlight. These are stocks of companies with market capitalizations of more than $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.

L-3

(LLL) - Get Report

provides a variety of communications, intelligence, surveillance and reconnaissance-related services, primarily in the U.S. Customers include the Department of Defense, the Department of Homeland Security, various other U.S. government departments and agencies, allied foreign government ministries of defense and commercial customers.

The buy rating on this stock is based primarily on expected benefits from a higher defense budget, an impressive bottom-line performance in the fourth quarter of 2007 and strong fundamentals. Fueled by robust top-line growth, operating margin expansion and essentially flat interest expense, L-3 recorded 20% year-over-year net-income growth for the fourth quarter. Because the company ranks among the top 10 largest federal contractors, it is well positioned to benefit from current government spending on defense and homeland security. The company could also see increased demand for its baggage-screening and surveillance systems due to higher security measures at airports.

Looking forward, management raised EPS guidance for the first quarter of 2008 to a range of $6.48 to $6.62 per share, up from an earlier view of earnings per share of $6.41 to $6.55. This boost was based mainly on the company's healthy backlog position and a favorable industry outlook. However, it is important to keep in mind that the company is heavily dependent on government spending, so any change in current trends or loss of key contracts could adversely affect the stock.

Apache

(APA) - Get Report

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% jump in production, the company's earnings more than doubled year over year for the fourth quarter. Net income rose to $1.07 billion, or $3.19 a share, from $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.

CSX Corp.

(CSX) - Get Report

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 serves more North American ports than any other U.S. railroad, and CSX World Terminals, another subsidiary, also reaches key ports in Europe, Asia and South America. The company provides multimodal transportation of domestic highway trailers and containers and operates a premium parcel business.

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 company's growth initiatives. CSX reported a 12% year-over-year increase in revenue for the first quarter. Net income grew 46% to $351 million, bolstered by margin expansion and other income. The gross profit margin increased to 31% from 28% in the first quarter of 2007, while operating profit margin also grew year over year to 23%. Earnings per share grew to 48 cents in the most recent quarter from 39 cents a year ago.

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 EPS in the range of $3.40 to $3.60, which would represent an increase of 23% to 30% from 2007. 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 benefiting 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, the company could still be sensitive to such changes in the future.

XTO Energy

( XTO) 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.

Murphy Oil

(MUR) - Get Report

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 that 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 with 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.

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

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