STOCK PICKS: Top 5 Mid-Caps for Aug. 28

Donaldson, Amphenol, Sigma-Aldrich, FMC and Flowserve make the list.
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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 we focus on mid-caps. These are stocks of companies that have market capitalizations of between $500 million and $10 billion that 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.

Donaldson

(DCI) - Get Report

is a worldwide manufacturer of filtration systems and replacement parts.

Donaldson has been rated a buy since December 2002. Our rating is based on the company's strong revenue growth, improving margins, low leverage levels and healthy cash position. These positives are further supplemented by higher engine filtration unit sales, robust off-road products and aftermarket sales and improved capacity utilization.

For the third quarter of fiscal 2008, Donaldson's revenue grew 21.4% year over year, driven by double-digit growth in its industrial products and engine products segments. Led by the higher revenue growth, the company's gross profit margin improved 96 basis points to 34.99% during the quarter, while its operating margin improved 44 basis points to 10.81%.

Net income grew 14.5% to $45.99 million from $40.15 million in the third quarter of fiscal 2007. Additionally, Donaldson's cash position was enhanced by a 10.5% increase in cash and cash equivalents, while net operating cash flow soared 112.3% to $57.54 million.

Management said it was pleased with what it saw as broad-based strength during the quarter, and it said it expects Donaldson's business conditions to remain good for the balance of fiscal 2008. Bear in mind that delayed shipments and the slowdown in residential construction markets may negatively affect the company's future financial results, as could EPA emissions standards that have affected new truck build rates. Shrinking returns, lower liquidity levels and an unfavorable product mix in gas turbine systems and industrial filtration solutions products could also be areas of concern.

Amphenol

(APH) - Get Report

designs, manufactures and markets electrical, electronic and fiber-optic connectors, interconnect systems and coaxial and flat-ribbon cable. The company has facilities for manufacturing and assembling its products in the Americas, Europe, Africa and Asia.

Our buy rating for Amphenol has been in place since June 2003. The company reported record EPS growth of 33% year over year for the second quarter of fiscal 2008, along with record sales that rose 23% to $846.8 million. The global communications, military and commercial aerospace markets performed particularly well for the company, although growth was broad-based.

Net income for the second quarter rose to $110 million from $84 million a year ago. During the quarter, Amphenol broadened its technology offering in the military market by completing the acquisition of a U.S. manufacturer of audio interconnect products for that market. Additionally, the company's profitability and cash flow remained strong in the second quarter.

Looking ahead, Amphenol forecasts revenue for the third quarter of fiscal 2008 in the range of $825 million to $840 million. In addition, EPS is expected to be in the range of 59 cents to 61 cents per share. The company raised its full-year 2008 revenue growth guidance to 15.0% to 16.0% year over year, or $3.28 billion to $3.31 billion.

Management reported continued strength in its business despite economic uncertainties and a generally moderate demand in certain markets. However, low profit margins could be a concern, as could any unfavorable changes, particularly in the communication and defense markets, which are the company's highest revenue contributors.

Sigma-Aldrich

(SIAL)

develops, manufactures and distributes a broad range of quality biochemicals and organic chemicals. These chemical products and kits are used in scientific and genomic research, biotechnology, pharmaceutical development and the diagnosis of disease.

Our buy rating for Sigma-Aldrich has been in place since November 2003. For the second quarter of fiscal 2008, the company reported revenue growth of 14.4% year over year. This growth appears to have trickled down to the bottom line, as earnings per share (EPS) improved 16.7% compared with the same quarter of fiscal 2007, rising from 60 cents per share to 70 cents per share.

Net income rose from $79.90 million in the second quarter of fiscal 2007 to $90.80 million in the most-recent quarter, while net operating cash flow significantly increased, rising 77.24% to $1.32 billion. Additionally, a low debt-to-equity ratio of 0.37 implies that the company has successfully managed it debt levels.

Management announced that it was pleased with the strong growth that Sigma-Aldrich achieved during the second quarter and that it expects the momentum to carry through the final quarter of fiscal 2008 and allow the company to meet its goal of 7% organic sales growth.

Looking ahead, the full-year EPS forecast has been increased to $2.62 to $2.72 per share. However, bear in mind that Sigma-Aldrich's future results could be negatively affected by changes in pricing because of the competitive environment, fluctuations in foreign currency exchange rates and regulatory changes.

FMC

(FMC) - Get Report

is a diversified, global chemical company operating in three business segments: agricultural products, specialty chemicals and industrial chemicals.

We have rated FMC a buy since July 2004. Although the company may harbor some minor weaknesses, its strengths can be seen in multiple areas. Revenue growth, for example, was reported at a rate of 22.6% year over year for the second quarter of fiscal 2008. Additionally, FMC significantly improved its earnings per share (EPS) from 19 cents in the second quarter of fiscal 2008 to $1.20 in the most recent quarter and has demonstrated a pattern of positive EPS growth over the past two years.

Additionally, net income rose 881.4% when compared with the same quarter one year prior, rising from $8.6 million to $84.40 million. According to the company, the record second-quarter results were driven by strong sales across all business segments.

Looking forward, management expects to see strong commercial performance across all segments in the third quarter of fiscal 2008, with the outlook for the industrial chemicals segment standing out as being especially promising. The company recently raised its full-year 2008 outlook on the basis of its first-half results and now anticipates earnings of $4.20 to $4.40 per diluted share. The company said it is confident in its ability to achieve these results despite rising raw-material costs, but it is important to bear in mind that such costs and the overall weakness of the economy could negatively affect FMC's financial results.

Flowserve

(FLS) - Get Report

engages in the development, manufacture and sale of precision-engineered flow equipments through three divisions: flowserve pump, flow control and flow solutions. The company operates worldwide in more than 56 countries, with 43% of its revenue coming from North America.

We have rated Flowserve a buy since January 2007 on the basis of several positive investment measures, such as the company's increasing revenue and net income. On July 30, the company reported that its net earnings for the second quarter of fiscal year 2008 increased 94.4% year over year to $122.86 million, from $63.21 million, attributable to increased sales in the flowserve pump (up 21.0% year over year), flow control (up 30%) and flow solutions (up 29%) divisions.

Revenue in the quarter increased 24.4% to $1.16 billion from $930.68 million a year ago, driven by strong growth in the power and chemical markets, as well as continued strength in the oil and gas market. The revenue result for the latest quarter included currency benefits of about $85 million. Furthermore, earnings per share increased 91.9% to $2.13 per share from $1.11 per share a year ago.

For the full fiscal year 2008, the company again raised its earnings outlook to a range of $7.20 to $7.50 per share, from its previous expectation of $5.90 to $6.20 per share announced at the end of the previous quarter. The company said it is encouraged by the results from the first half of fiscal year 2008 and its continued strength in key markets, and said it remains confident in its ability to successfully carry out its operational excellence initiatives to increase its performance in the current global environment.

Bear in mind, however, that the recent surge in commodity costs is a challenge to the machinery industry as a whole and could therefore affect Flowserve's results in the future.

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.

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