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Stock Screen: Conservative Stocks - October 31, 2011
Value Line offers a number of proprietary measures to help investors identify conservative stocks, the most notable being the Safety Rank. This measure is computed by averaging a stock’s Price Stability score and its Financial Strength Rating. Safety ranks range from 1 (Highest) to 5 (Lowest) and are distributed roughly in a bell curve, with the largest number of stocks scoring 3 (Average) and smaller number at the extremes. Obviously, selecting stocks that score 1 or 2 (the best possible scores) would help investors avoid riskier fare.
Value Line provides screens each week, published in the Index section of The Value Line Investment Survey, that cull out stocks earning the best Safety Rank and the second best Safety Rank (presented as two separate screens). This alleviates the need to rummage through on a stock-by-stock basis, trying to find the most conservative fare. Some interesting stocks that recently made these elite lists include Equifax, Inc. (EFX), DreamWorks Animation SKG, Inc. (DWA), and Snap-on, Inc. (SNA).
Equifax is a leading global provider of information solutions for businesses and consumers. The company’s products are based on databases of consumer and business information derived from credit, financial, employment and income, public record, demographic and marketing data. It uses proprietary and analytical tools to analyze this data and create customized insights, decision-making solutions and processing services for businesses. Further, EFX helps consumers understand, manage and protect their personal information and make more informed financial decisions. The company is a leading provider of online consumer credit reports and payroll-related and human resources business process outsourcing services in the United States. The U.S. accounted for 73% of 2010 revenues.
Equifax delivered another solid performance in the September interim with all five of its business units delivering revenue growth, three of which comfortably exceeded expectations. This outperformance was largely driven by product innovation, as a number of new services have been gaining meaningful market share. Specifically, the Decision 360 platform has stood out recently, as it helps lending institutions assess customers’ ability, willingness, and capacity to pay their debts. Further, the USCIS unit scored a $20 million two-year contract with a large bank to be their primary credit reporting partner. The International business is also being helped by new products, with 14% of 2011 revenue coming from products launched in 2008, 2009, and 2010. Russia and certain Latin American countries are performing the best.
The operating margin is exhibiting strong growth, climbing 154 basis points in the September interim. This is being driven by broad-based improvements in operating leverage and the merger of its Brazilian operations with Boa Vista Servicos S.A. in May 2011. We expect this thriving region to continue benefitting results for the foreseeable future. Although the mortgage segment continues to weigh down Equifax’s companywide performance, potential homebuyers have been utilizing the online analytic tool more frequently. In all, we like recent growth initiatives and think this conservative stock would be a suitable choice for risk-averse investors.
DreamWorks Animation SKG, Inc.
DreamWorks, a former division of DreamWorks Studios, is primarily engaged in the development, production, and distribution of computer generated (CG) animation films. The company maintains full rights to all of its CG films, but shares in the distribution revenues. DreamWorks’ films include the Shrek, Kung Fu Panda, and Madagascar franchises, among others.
The stock has been hit hard following the release of its second major studio release of 2011, Puss in Boots, a spinoff of its popular Shrek series. The animated film was number one at the box office its opening weekend with $34 million in ticket sales. This was less than the $42 million forecast made by Boxoffice.com, a respected source for such estimates. We note that a snowstorm in the Northeast may have hurt the film’s opening performance. Currently, Puss in Boots has an 82% approval rating from movie review aggregator rottentomatoes.com, and DreamWorks’ films have historically had long shelf lives. Therefore, we believe there is a chance that the movie will end up performing better in the following weeks.
The stock price has declined in the high single digits on the news. We think the reaction may be overly severe and believe value investors may now want to consider this stock for its above-average recovery potential out to the 2014-2016 timeframe.
Snap-on is a leading manufacturer and marketer of tools, equipment, diagnostics, repair information and systems solutions. Products and services include hand and power tools, tool storage, diagnostics software, information and management systems, shop equipment and other solutions for vehicle dealerships and repair centers, as well as customers in industry, government, agriculture, aviation and natural resources. The company markets its products and brands through distribution sales channels in approximately 130 countries.
Snap-on has been benefiting from investors’ renewed interest in industrial and machinery stocks. Indeed, these shares have gotten a lift from a slightly less gloomy global economic outlook in recent weeks, and strong earnings results from a number of major industrial players. Management recently commented that demand has stayed consistent recently, and the weakness many investors had been anticipating never materialized. The company rolls out approximately 40 new products a year and these are helping deliver strong sales in the United States. This helped the operating margin rise by 326 basis points, year over year, in the September interim, as did strength from its financing arm.
We look for emerging market momentum to continue benefiting the company’s top line in the future. Indeed, many of the gains it is experiencing are far in excess of GDP growth in countries like Russia, China, and Turkey. This, along with the aforementioned new products and consistent demand make Snap-on shares a solid choice for conservative investors, in our view.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.