Each weekday, 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
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.
Hess ( HES), which is involved in every aspect of crude oil and natural gas from exploration to distribution, 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 because of 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 because of the rising number of automobiles. The U.S. imports more than 60% of its energy requirements from other countries, and this 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 the high-tech defense manufacturer Essex, 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.
Diversified industrial manufacturer Eaton ( ETN) has been rated buy since August 2005. The company said second-quarter revenue increased 3.9% to $3.25 billion, boosted by acquisitions and exchange rates as well as favorable conditions in the electrical and fluid power segments. Return on equity increased 57 basis points to 20.8% from 20.2%. Cash and cash equivalents also increased to $494 million, from $479 million. During the quarter, Eaton made a series of acquisitions in a bid to extend its product offerings. Management expects slightly stronger growth in the electrical markets, despite weaker than anticipated conditions in the North American hydraulics markets. Eaton serves the end-markets, and any volatility in that area may affect its top and bottom lines. Also, the company faces risks from declining net income, operating margin and return on assets as well as higher debt levels and lower liquidity.
Total S.A. ( TOT), an integrated oil and gas company, has been rated buy since September 2005. The company's revenue growth outpaces that of the industry average, driving higher earnings. Total has demonstrated a pattern of positive EPS growth over the past year, a trend that should continue. In August, Total said second-quarter net income fell 1% to $4.66 billion, while revenue fell 4% to $53.41 billion. Even though it has already enjoyed a nice gain the past year, Total's stock should continue to move higher. The company has demonstrated a pattern of positive earnings per share growth over the past year, and this trend is expected to continue. These strengths outweigh the company's low profit margins.