Top Five Large-Cap Stocks

Apache, Smith International, Noble, CSX 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 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.

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 for the fourth quarter more than doubled year over year. Net income rose to $1.07 billion, or $3.19 a share, vs. $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 fiscal 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. However, Apache's future performance depends on its ability to achieve positive results from previous acquisitions. The company also faces challenges from increasing debt levels and comparatively low shareholder returns.

Smith International

( SII) 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 $175 million, or 87 cents a share, vs. $160.2 million, or 80 cents a share, in the first quarter of 2007. Revenue for the first quarter grew 12% year over year to $2.37 billion due to a rise in the Oilfield segment's business volumes. A quarterly dividend of 12 cents a 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.

Noble Corp.

(NE) - Get Report

is an offshore drilling contractor for the oil and gas industry. The company provides contract drilling services using a fleet of 62 mobile offshore drilling units. These units are deployed in key markets worldwide, including the Middle East, Mexico, the North Sea, the Gulf of Mexico, Brazil, West Africa and India. The company also provides labor contract drilling services, well site and project management services, engineering services and value-added drilling-related products and services. Noble strives to expand international and offshore deepwater capabilities through acquisitions, rig upgrades and modifications, as well as through redeployment of assets in important geographical areas.

Our buy rating for Noble has not changed since June 2004. Revenue surged 33% year over year to $861.4 million in the first quarter of fiscal 2008. Record-high energy prices and a strong demand for the company's offshore drilling fleet drove earnings up 54% to $384.2 million, or $1.43 a share, vs. $250.3 million, or 93 cents a share, in 2007. During the quarter, the company secured commitments on eight deepwater rigs for multi-year terms commencing as late as fiscal 2010, and had about 83% of its total rig operating days committed for fiscal 2008 as of March 31. Additionally, about 50% of its total rig operating days were already committed for fiscal 2009.

Management feels that Noble continues to deliver excellent results, as demonstrated by a fifth consecutive quarter of record earnings. Bear in mind, however, that Noble's performance is dependent on the number of rigs operational in the market, which is in turn determined by the quantum of drilling activities. These activities are cyclical in nature. Additionally, lower demand for energy products caused by weakness in the U.S. economy could ultimately impact drilling-related activities.

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. The company 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% year-over-year increase in revenue for the first quarter. Net income grew 46% to $351 million, bolstered by margin expansion and other income. Gross profit margin in the first quarter increased from 28% in the first quarter of 2007 to 31%, 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% to 30% 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.

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 more than doubled. The company attributed the increase to higher product prices and increased production volumes, which overcame the weakness reflected in its refining results. While Murphy Oil's 46% one-year stock price increase makes it expensive compared to 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 Murphy Oil's 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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