Lincoln National ( LNC) operates insurance and investment management products and services in the U.S. and U.K. and has been a buy since September 2004. In April 2006, LNC completed the acquisition of Jefferson-Pilot Corporation, one of the nation's largest life insurance companies. After the acquisition, LNC ranks among the industry leaders across all its product lines and expects annualized, pretax cost saving of approximately $180 million starting from the third year of the acquisition. We are positive on the earnings growth potential of LNC due to the Jefferson-Pilot acquisition as well as the projected strong demand from the baby boomer generation for various savings and protection products. The main risk to the buy rating, however, includes any roadblocks in the integration with Jefferson-Pilot, any undue decline in equity market leading to a fall in account value, and any adverse regulatory development.
Investment firm Franklin Resources ( BEN) has had a buy rating since July 2005. The company has had a consistent track record of its funds, increasing its presence in international markets, especially in emerging markets. Franklin also is consistently showing improvement in its profitability. However, any adverse change in beneficial tax treatment from foreign earnings can hurt its results.
Loews ( LTR) has been rated a buy since November 2004. The company has diversified holdings, which include property casualty insurers CNA Financial ( CNA), cigarette maker Carolina Group ( CG), an offshore oil and gas driller, hotels and the Bulova watch company. We believe this wide-ranging business portfolio helps generate stable revenue growth and spreads the company's risks. Loews' strong balance sheet is another positive. This liquidity helps it meet future insurance liabilities and fund capital expenditures. However, the buy rating on the stock is subject to litigation risks in the company's cigarette business, the impact of any decline in energy prices on its drilling business and the impact of any substantial catastrophic losses in its insurance operations.
Charles Schwab ( SCHW) has earned a buy rating since January 2005. Looking ahead, we expect Schwab to benefit from its recent price cuts and low-cost product offerings. In August 2006, the company launched a suite of mutual fund portfolios for individuals with as little as $50,000 to invest. Additionally, the total cost of its managed portfolios is estimated to range from 1% to 1.45%, which is considerably lower than the average of 2.5% charged by other mutual funds and could help the company increase its share in an estimated market of 38 million U.S households with between $50,000 and $1 million to invest. However, the principal risks to our buy rating on the stock include any downturn in the securities markets, the resultant drop in trading volume and margin borrowing and any increased trading commission competition.
Defense contractor Lockheed Martin ( LMT) has been a buy rating since July 2004. The company's positives include growing revenue due to increasing demand for defense systems and commercial satellites, a growing product base and international presence. To reduce its dependence on U.S. defense spending, Lockheed is entering into nonmilitary areas such as air traffic management and IT outsourcing. The company is also increasing its international footprint by making acquisitions abroad. The company is also making efforts to sell F-16 fighter jets to India and Pakistan, as these nations are investing heavily to upgrade their military strength. However, the company's aeronautics segment continues to report declining revenues, which tempers our optimism.
Thermo Electron ( TMO), which provides analytical instruments, has been a buy rating since July 2004. The company has exhibited top-line growth, which is spurred by robust demand for products, as well as a strong cash position supporting growth initiatives. On the downside, however, Thermo's international operations expose it to the risk of foreign currency fluctuations.
We have given media giant News Corp. ( NWS) a buy rating since July 2005. The company's strengths can be seen in its notable return on equity, reasonable valuation levels, good cash flow from operations, solid stock price performance and impressive record of earnings-per-share growth. While the forecasts for News Corp. are impressive, several uncertainties remain, including legislation and court rulings on media merger concentrations within geographical regions, splitting up the royalty pie of DVD distribution fees with screenwriters, competing with cheaper cable advertising rates, and the rising popularity of "zipping" -- fast-forwarding through commercials by Digital Video Recorder (DVR) owners. Newspaper companies are desperate to see a rebound in corporate and classified advertising. However, the recent circulation scandals at publishers such as Belo, Tribune and Hollinger International have given the industry a black eye.