Top Five Large-Cap Stocks: Hess

Hess, Chevron, Diamond Offshore, CSX Corp. and Smith International are all on top.
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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.

Hess

(HES) - Get Report

is a global independent energy company that explores for, produces, purchases, transports and sells crude oil and natural gas. The company conducts exploration and production activities in countries worldwide, including the U.S., the U.K., Norway, Denmark, Equatorial Guinea, Gabon, Azerbaijan, Thailand and Indonesia. The company also manufactures, purchases, trades and markets refined petroleum and other energy products. Hess operates approximately 1,250 retail facilities in the eastern U.S., along with a convenience store network.

We have rated Hess a buy since August 2004. Propelled by price increases for natural gas, natural gas liquids and oil, the company's total revenue and non-operating income for the first quarter of fiscal 2008 rose 45% year over year. An increase in the company's average daily production of natural gas and crude oil also contributed to the improvement. Hess also announced that its first-quarter net income more than doubled to $759 million. Additionally, net operating income increased significantly in the first quarter, rising 84%.

While oil prices are currently trading at record levels, these prices are also highly volatile and cyclical in nature. Because Hess generates a significant portion of its income from the production of oil and gas, any significant unexpected downturn in oil prices could negatively affect the company's earnings. Such a downturn could occur if high oil prices generate higher demand for low-cost alternatives or if the slowdown in the U.S. economy and weakness in the U.S. labor market put further pressure on the demand for oil and gas products.

Chevron

(CVX) - Get Report

is one of the world's largest integrated energy companies. It is engaged in every aspect of the oil and natural gas industry, with major operations in many important gas and oil producing regions worldwide. Household products, packaging, and fuel additives are made from the chemicals that Chevron produces. Chevron also works in manufacturing, marketing and transportation, along with other interests that include coal mining operations, power generation businesses, worldwide cash management and debt financing activities, corporate administrative functions, insurance operations, real estate activities and technology companies. Chevron is headquartered in California, and conducts operations in more than 100 countries.

We have rated Chevron a buy since October 2003. This rating is based in part on the company's strong growth in revenue and earnings, as well as its attractive valuation levels. For the first quarter of fiscal 2008, Chevron's revenue rose 40% year over year. The company reported net income of $5.17 billion, or $2.48 a share, vs. $4.72 billion, or $2.18 a share, in the year-ago quarter. This represented a 9.6% increase in net income, while EPS improved 14%. Additionally, net sales for the quarter were boosted by higher prices for crude oil, natural gas and refined products, growing to $64.66 billion from $46.3 billion a year ago.

The company reported that strong cash flows from operations allowed it to fund major development projects as a foundation for future growth. Bear in mind, however, that the company's performance depends largely on the movements of crude oil and natural gas prices. Any adverse changes in these prices could negatively impact revenue. Furthermore, lower sales volumes and margins on the sale of refined products could also negatively affect the company's bottom line.

Diamond Offshore

(DO) - Get Report

engages in the contract drilling of oil and gas wells. The company's fleet of 30 submersibles enables it to offer a range of services in various markets worldwide, including the deep water, harsh environment and conventional semisubmersible markets. Diamond also owns 13 jack-up rigs, which are mobile, self-elevating drilling platforms equipped with legs that are lowered to the ocean floor until a foundation can be built to support the platform. Finally, Diamond also has one drillship, the Ocean Clipper, located offshore Brazil.

We have rated Diamond a buy since June 2005. Boosted by solid sales growth from its Contract Drilling business segment, Diamond's revenue surged 29% year over year to $666.7 million in the first quarter of fiscal 2008. Earnings rose 30%, fueled by a rise in daily rates for the company's deepwater rigs. Net income increased to $290.6 million, or $2.09 a share, from $224.2 million, or $1.64 a share, a year ago. In keeping with its policy of considering the payment of special cash dividends on a quarterly basis, the Board of Directors recently declared a special cash dividend of $1.25 per share of common stock in addition to a regular cash dividend of $0.125 per share of common stock. Both dividends are payable in June. Finally, Diamond's debt-to-equity ratio is very low at 0.17, implying that debt levels have been successfully managed.

While lower than a year ago, Diamond's gross profit margin remains relatively high at 62%. However, the company's net profit margin of 37% significantly outperformed against the industry. Furthermore, the company has demonstrated a pattern of positive EPS growth over the past two years, and we feel that this trend could continue. We feel that the slowdown in the U.S. economy and weak job data pose some risk as they may put pressure on the demand for oil and gas. This could in turn disturb activities related to exploration and production, affecting the number of rigs that are operational in the market and potentially affecting Diamond's future profitability.

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 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 to 31% from 28% in the first quarter of 2007, while operating profit margin also grew year over year to 23%. CSX reported that earnings per share grew to 48 cents 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 2008, management targets earnings per share in the range of $3.40 to $3.60 a 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.

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 fiscal 2007. Revenue for the first quarter grew 13% 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 a 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.

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.