Top Five Large-Cap Stocks: April 16
Updated from 7:19 a.m. 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.
L-3 Communications
(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. For the fourth quarter, L-3 recorded 20% growth in net income year over year. The improvement was fueled by robust top-line growth, operating margin expansion and essentially flat interest expense. Because the company ranks among the top ten largest federal contractors, it is well positioned to benefit from current government spending on defense and homeland security. The company could also see an 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, up from an earlier view of $6.41 to $6.55. This boost was based mainly on the company's healthy backlog position and a favorable industry outlook. It is important, however, to keep in mind that the company depends heavily 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, 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 a 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.
EOG Resources
(EOG) - Get Report
explores for, develops, produces and markets natural gas and crude oil primarily in major producing basins in the U.S., Canada, offshore Trinidad, the United Kingdom North Sea, and from time to time, select other international areas. A substantial portion of EOG's U.S. and Canada natural gas reserves are in long-lived fields with well-established production histories. For fiscal 2007, production increased 11% over 2006, driven by the Fort Worth and Rocky Mountain operating areas.
EOG Resources has been rated buy since December 2005. For the fourth quarter of 2007, the company reported net income available to common shareholders of $358 million, or $1.44 a share, vs. $237.2 million, or 96 cents a share, in the year-ago quarter. In addition, the company increased the quarterly cash dividend on its common stock to 12 cents a share, payable beginning April 30, 2008 to holders of record as of April 16, 2008.
Demand for oil and gas is continuously increasing in the U.S., even with oil prices that are notably above their historical averages. Together with rising prices, this increasing demand has encouraged production companies like EOG to increase their efforts to produce oil. Looking forward, the company plans to continue expanding its North American drilling program and expects significant production gains from the Fort Worth Barnett Shale and the North Dakota Bakken. Due primarily to expanded drilling operations in the latter, the company has increased its total crude oil and condensate production target growth.
Bear in mind that there are risks to our buy rating; oil and gas prices are highly volatile and cyclical in nature. The company is also subject to unforeseen occurrences such as blowouts, fires and loss of well control, which can destroy production facilities.
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 an 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.
Devon
(DVN) - Get Report
is an independent energy company that explores for oil and gas. The company also processes natural gas and develops, produces and transports oil, gas and natural gas liquids (NGLs). Additionally, the company markets natural gas, crude oil and NGLs. It has midstream operations constructing and operating pipelines, storage and treating facilities, and gas processing plants. Devon's oil and gas properties are primarily in the U.S. and Canada, but the company also owns some properties in Azerbaijan, Brazil, China and Russia.
Our buy rating for Devon has not changed since September 2004. Our rating is based on the company's strong growth in revenue and net income, which are further supported by higher realized oil and natural gas liquids prices, rising production volumes, key divestitures and sound cash levels. Devon's total revenue for the fourth quarter of 2007 surged 32% year over year to $3.2 billion, as the Oil and Natural Gas Liquids segments saw strong performance. Net income more than doubled to $1.32 billion, or $2.45 a share, vs. $582 million, or $1.11 a share, in the fourth quarter of 2006. The company's oil and natural gas liquids production grew 12% and 19%, respectively. This aided the company's fourth-quarter performance, as did increases in the price for natural gas liquids and the realized oil price.
The company is currently in the process of making strategic divestitures that we feel support our buy rating. Devon completed the sale of its operations in Egypt for an adjusted sales price of $341 million. In November 2007, the company announced an agreement to sell its operations in Gabon and is in the process of divesting its remaining assets and terminating all of its operations in West Africa.
Devon's future performance will be highly influenced by commodity prices. Any volatility in energy prices could affect the company's profitability and growth rates. The company also faces challenges from an increase in its debt level and a decline in return on equity, which could impact the company's growth going forward.
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.
Know What You Own
: XTO operates in the oil and gas industry, and some of the other stocks in its field include
BP
(BP) - Get Report
,
Exxon Mobil
(XOM) - Get Report
and
ConocoPhillips
(COP) - Get Report
. These stocks were recently trading at $66.83, +2.08%, $91.72, +1.01% and $82.36, +1.38%, respectively. For more on the value of knowing what you own, visit TheStreet.com's
section.
This article was written by a staff member of TheStreet.com Ratings.