L-3 Communications Holdings ( LLL), a military-equipment company, has been rated a buy since August 2005. It recently reported that its second-quarter earnings nearly tripled over the same period last year. Higher defense spending worldwide, together with the company's recent acquisitions and a healthy backlog order book, encouraged management to raise guidance for fiscal 2007.
Parker-Hannifin ( PH), which makes motion and control technologies and systems, has been rated a buy since October 2006. The company's revenue and net income for the fourth quarter of fiscal 2007 were both up over the year-earlier period, driven by higher sales volume from its aerospace and industrial international divisions. Aerospace sales grew 5.9%, supported by a rise in both commercial original equipment manufacturer and aftermarket volumes. International industrial revenue increased 30.3% on the back of higher sales in Europe, Latin America and the Asia Pacific region. Parker-Hannifin also posted higher return on equity for the quarter. The company has been involved in a series of acquisitions, most recently of Rectus, a manufacturer of quick disconnect couplings and related products for pneumatic, hydraulic, medical and chemical processing applications. There are potential risks, however. Parker-Hannifin operates in a highly competitive environment, and its growth is partly dependent on the continued development of new products and technologies. A significant portion of the company's revenue comes from customers outside the U.S.; this leaves it vulnerable to adverse foreign policy and currency risk.
Brazilian oil company Petrobras-Petroleo Brasileiro ( PBR) has had a buy rating since September 2005. The company's revenue growth has outpaced the industry average and its stock price has increased by 88.27% in the 12 months prior to Sept. 27. And while any stock can fall in a broad market decline, it should continue to move higher. Petrobras' stock is also attractively valued and its net income increased and earnings grew in the second quarter compared with the same period last year. These strengths outweigh the company's somewhat disappointing return on equity.
Hess ( HES) is involved in every aspect of crude oil and natural gas from exploration to distribution, and it has earned a buy rating since August 2005. The company has shown steady top-line growth, with revenue climbing 8.3% to $7.27 billion year over year in the most recent quarter, primarily due to increased production volumes and crude oil prices. U.S natural gas consumption is expected to grow 2.9%, while demand for crude oil is expected to grow at an average rate of 1.5% annually, largely due to the rising number of automobiles. The U.S imports more than 60% of its energy requirements from other countries, which could result in an increase in the transportation of crude oil and natural gas. This trend should benefit Hess as it is in the business of exploration, production and transportation of natural gas and crude oil. Any unexpected sharp downturn in oil and gas prices may hurt earnings, however. Exploration disruptions also could harm results.
Aerospace and defense contractor Northrop Grumman ( NOC) has carried a buy rating since August 2005. Northrop has seen revenue and net income increase, and the federal government's fiscal 2008 budget request continues to favor spending on defense and homeland security. The company's growth will also be driven by its acquisition of high-tech defense manufacturer Essex Corp., which was completed on Jan. 26. During the second quarter Northrop Grumman had several new contract wins, including a $2.40 billion contract from the U.S. Navy, and its order backlog as of June 30 stood at $60.40 billion. Additionally, NOC expects its record contract acquisitions of $38.80 billion that were completed in fiscal 2006 to significantly contribute to its top-line growth in fiscal 2007. Northrop Grumman's business is highly cyclical and dependent on government spending. A reduction in national security spending could cause a risk to its buy rating.