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STOCK PICKS: Top 5 Large-Cap for Aug. 20

Danaher, Union Pacific, Northern Trust, McDonald's and The TJX Companies make the list.

Each business day,

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.



is a diversified industrial company that designs, manufactures and markets industrial and consumer products, services and technologies.

We have rated Danaher a buy since December 2002. Our current recommendation is based on the company's double-digit revenue growth, impressive growth in net income and earnings per share (EPS), and improving gross margins. For the second quarter of fiscal 2008, the company reported that its revenue increased 24.8% year over year, driven by significant contributions from its acquisitions and the positive impact of foreign currency translations.

Danaher's gross profit margin expanded significantly by 241 basis points when compared with the same quarter last year, rising from 48.06% to 50.47%. In addition, the company reported net income of $363.45 million, up 16.8% from the prior-year quarter, while EPS improved from 94 cents to $1.09 over the same period.

Management announced that the company should be well positioned to deliver positive results for the remainder of fiscal 2008, despite challenging economic conditions. Danaher expects its third-quarter adjusted EPS to be in the range of $1.09 to $1.14, and it anticipates full-year EPS in the range of $4.34 to $4.42. However, the company experienced a decline in operating margin and returns in the second quarter, which might hamper its future profit growth prospects.

Union Pacific


provides rail transportation through its principal operating company, Union Pacific Railroad, which runs the largest railroad in North America.

Union Pacific has been rated a buy since February 2005, due to its record of earnings per share growth, improvements in revenue and net income, consistent cash flow from operations and solid stock price performance. During the second quarter of fiscal 2008, the company's earnings grew 19.1% year over year, boosted by higher shipments of coal, grain and fertilizer. Earnings were partially offset by rising fuel costs and the recent flooding in the Midwest.

Net income rose to $531 million in the quarter from $446 million in the second quarter of fiscal 2007. Earnings per share also increased, rising 23.6% to $1.02 per share from 82 cents per share in the same quarter last year, while revenue improved 12.9%. Additionally, net operating cash flow increased 32.93% when compared with the second quarter last year.

While the recent Midwest flooding caused a decrease in earnings for the second quarter, management said it was pleased with the resiliency that Union Pacific's network exhibited after the crisis, with a quick restoration of service allowing the company to finish the quarter strongly. The company anticipates challenges from high fuel prices and a soft economy going forward but expects that it will be able to take advantage of the opportunities presented by a diverse business mix. However, any failure to counter these issues could affect the company's future prospects.

Northern Trust


is a provider of investment management, asset and fund administration, fiduciary and banking solutions to corporations, institutions, and affluent individuals.

Northern Trust has been rated a buy since March 2005. On July 16, the company announced that it achieved strong core results in the second quarter of fiscal 2008. Earnings increased 4.2% year over year, aided by revenue growth of 24%. The company's revenue growth was driven by higher trust, investment and other servicing fees, foreign-exchange trading income and net interest income. Net income inched up to $215.6 million, from $206.9 million a year ago. During the second quarter, the company repurchased 39,782 shares for a total cost of $2.9 million.

Management was pleased with the second quarter results in the face of a challenging business climate. Bear in mind, however, that any adverse movements in global capital markets may affect Northern Trust's future financial performance.



primarily operates and franchises McDonald's restaurants. The company also operates Boston Market and Chipotle Mexican Grill in the U.S. and has a minority ownership interest in U.K.-based Pret a Manger, a quick-service food concept that serves mainly prepared and packaged cold sandwiches, snacks and drinks during lunchtime.

We have rated McDonald's a buy since March 2004, on the basis of strengths such as its solid stock price performance and an impressive record of earnings per share growth. The company announced that its comparable sales and guest counts grew across all geographic segments in the second quarter of fiscal 2008.

Profitability also increased during the second quarter. McDonald's revenue increased 4% year over year, contributing to a significant earnings per share (EPS) improvement from a loss of 59 cents in the second quarter of fiscal 2007 to $1.04 in the most-recent quarter. Net income surged 267.3% when compared with the same quarter a year ago. Additionally, the company experienced double-digit operating income growth in several geographic regions (Europe and Asia/Pacific, the Middle East and Africa) and produced solid quarterly results in the U.S.

Looking ahead, management stated that it believes the company will continue to have momentum due to a collective focus on delivering quality products at good value. While the company may currently harbor some minor weaknesses, we do not expect them to have a significant impact on McDonald's future financial results.

TJX Companies


is an off-price retailer of apparel and home fashions in the U.S. and worldwide. The company's mission is to deliver a rapidly changing assortment of quality, brand-name merchandise at prices that are 20% to 60% less than the regular prices of department and specialty stores, every day, to a core target audience of middle- to upper-middle-class shoppers.

TJX has been rated a buy since November 2001. On Aug. 12, the company reported that its earnings tripled in the second quarter of fiscal 2009 (ended July 26), supported by sales growth. Net income rose to $200.22 million from $59.03 million in the second quarter of fiscal 2008. Excluding one-time items, the company earned 47 cents per share. During the second quarter, revenue grew 7.1% year over year to $4.31 billion, attributable to 4% growth in comparable-store sales and a 0.5% contribution from foreign-currency translations.

Double-digit growth from the Winners, HomeSense, and T.K. Maxx segments also contributed to sales growth. The company added 19 stores during the quarter and repurchased 7 million shares of its common stock for $225 million.

Management announced that it was very pleased with TJX's second quarter performance, given the challenging retail environment. The company is looking to build for the future by capturing new customers and maintaining or developing strong vendor relationships in the current environment, while still striving for sustained revenue growth.

The company expects third-quarter EPS to be between 59 cents and 62 cents, and it raised its full-year EPS forecast to a range of $2.25 to $2.26. Bear in mind, however, that lower retail sales, changing consumer trends and preferences and any failure to introduce new products and services could negatively affect future financial results.

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 Ratings.