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Stock Screen: Conservative Stocks - February 10, 2012
Value Line offers a number of proprietary measures to help investors identify so-called conservative stocks, the most notable being the Safety Rank. This measure is computed by averaging a stock’s Price Stability score and the company’s Financial Strength Rating. Safety Ranks range from 1 (Highest) to 5 (Lowest) and are distributed roughly in a bell curve, with the greatest number of stocks scoring 3 (Average) and the smallest number at the extremes (i.e. 1 and 5). Thus, selecting stocks that hold the best possible scores (i.e., 1 or 2) would help investors to 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 highest 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. Three noteworthy stocks that recently made the list are Edwards Lifesciences Corporation (EW), PepsiCo Inc. (PEP), and Ecolab Inc. (ECL).
Edwards Lifesciences Corporation
Edwards Lifesciences is a global leader in products and technologies designed to treat advanced cardiovascular disease. The company focuses specifically on technologies that treat structural heart disease and critically ill patients. Cardiovascular disease is the number-one cause of death in the world, and is the most expensive disease in terms of health care spending in nearly every country. The affliction is progressive and worsens over time, often affecting the entire circulatory system. It frequently requires surgical intervention, especially in its later stages.
Edwards Lifesciences categorizes its cardiovascular disease treatment products into four main areas: heart valve therapy, critical care, cardiac surgery systems, and vascular. The company is the world leader in heart valve therapy, and the segment represented 58% of 2010’s sales. The product line is centered on the Perimount pericardial valve, the most widely prescribed tissue heart valve in the world. These are produced from biologically inert animal tissue sewn onto proprietary wireform stents. Edwards is also at the forefront of hemodynamic monitoring systems, used to measure a patient’s heart function in surgical and intensive care settings, forming the core of the critical care unit, which accounted for 32% of sales in 2010. These systems enable a clinician to balance oxygen supply with demand in a critically ill patient, and are important in assuring tissue and organ perfusion. The cardiac surgery systems business (7%), meanwhile, offers products that complement the heart valve therapy line, and includes instruments used in cardiac surgery procedures. Finally, the vascular segment (3%) offers devices used in the treatment of atherosclerosis and other vascular ailments. Products include balloon-tipped, catheter-based embolectomy equipment, surgical clips, and clamps.
Edwards sells both domestically and internationally. U.S. sales, which accounted for 39% of the top line in 2010, are conducted almost entirely through its direct sales force. International sales, by contrast, are derived from both the direct sales force and independent distributors. Of the total international sales, 32% were in Europe, 17% in Japan, and 12% from the rest of the world. The company has a wide client base, and no single customer accounted for more than 10% of sales in 2010.
Despite challenging economic conditions, Edwards Lifesciences has managed to produce steady gains in the top line over the last several years. Indeed, the top line advanced by 16% in 2011, on the heels of 18% growth in 2010. A solid product pipeline should propel sales this year, too, as the company’s artificial Sapien heart valve recently received FDA approval, and management projects potential revenue growth in excess of 20% this year. Additionally, the Centera valve, a low-profile self-expanding valve currently under development shows promise. The new product could be offered in Europe late in 2013, and ought to enhance Edwards’ ability to contend with other self-expanding transcatheter aortic valve implantation (TAVI) devices offered by competitors, which many interventional cardiologists consider easier to implant.
Growth portfolios would do well to include these shares. Earnings growth has been robust, and pushed ahead by about 8% in 2011. Our conservative outlook puts the quotation at about $110 over the next three to five years, but we think with its impressive portfolio of both existing and forthcoming products could lift the share price even further. The stock is a very safe selection, with a low Beta and high Price Stability marks.
PepsiCo is a leading global food, snack, and beverage company. Its major brands are household names recognized throughout the world and include Quaker Oats, Tropicana, Gatorade, Lay’s, and Pepsi, among others. The company makes, markets, and sells its food and beverage portfolio in over 200 countries independently or through contract manufacturers. Its largest operations are in the United States, Canada, Mexico, Russia, and the United Kingdom.
PepsiCo is organized into six divisions divided across four business units. The PepsiCo Americas Foods unit consists of the Frito-Lay North America division (23% of revenue in 2010), the Quaker Foods North America division (3%), and all of the Latin American food and snack businesses (11%). PepsiCo Americas Beverages (35%) comprises PepsiCo Beverages Americas and Pepsi Beverages Company. Finally, PepsiCo Europe (16%) includes all beverage, food, and snack businesses in Europe, while PepsiCo Asia (12%), Middle East, and Africa consists of all beverage, food, and snack business in those regions.
The company’s center of attention is on future growth drivers. Though PepsiCo is the largest player in the macro snack category, we think it still has expansion room. Indeed, building and extending this portfolio is its primary focus. Management recently announced a back-to-basics strategy following market share losses to arch rival Coca Cola (KO – Free Coca-Cola Stock Report), and investors' concerns that it was focusing too much on new products and not core brands. It conducted a strategic review and decided it was in its own best interest not to split up the food and beverage units into separate businesses due to their complementary nature and potential cost synergies which include supply chain improvements, better procurement measures, and a more efficient R&D program. The plan calls for raising the marketing spend by $500 million to $600 million to revive its Soda and Snacks units. Finally, investments in emerging markets, where soft drink and snack food consumption has ample room for expansion, are a primary concern, and should provide substantial top line growth.
PepsiCo has positioned itself for steady, long-term growth, and this is likely to be reflected in its stock price. Indeed, the issue has a very low Beta and scores top marks for Price Stability, implying that PEP is likely to continue its measured appreciation without much interruption for the long haul. On top of this sturdiness, investors in PepsiCo are rewarded with a solid, well-covered payout. Conservative investors looking for a long-term investment may want to take a look.
Ecolab develops and markets premium cleaning and sanitizing products and programs, as well as pest elimination, maintenance, and repair services to customers in the foodservice, hospitality, healthcare, and commercial facilities management markets. The company’s operations are divided into three segments: United States Cleaning & Sanitizing, United States Other Services, and the International Segment. U.S. Cleaning & Sanitizing provides cleaning and sanitizing products to markets in the U.S., and is comprised of six business units, Institutional, Food & Beverage, Kay, Healthcare, Textile Care, and Vehicle Care. U.S. Other Services, by contrast, consists of pest elimination and GCS Services, which provides equipment repair and maintenance services to the U.S. commercial food service industry. Ecolab conducts business in approximately 72 countries outside the United States, and these activities fall under the International Segment.
Most of Ecolab’s products are manufactured in wholly owned production facilities, though third-party contractors manufacture some. Customer deliveries are made from the company’s production facilities and a network of distribution centers and third-party logistics providers. Common carriers, Ecolab delivery vehicles, and distributors provide transport of finished products to customers. The company is committed to client support and pursues a “circle the customer – circle the globe” strategy, by providing solutions to its customers operations around the world. The operating segments, therefore, function interdependently, as customers may utilize the products or services of multiple segments.
Though it has faced higher input costs in recent quarters, an efficiency program, including a European restructuring, has allowed it to keep margins from tightening too much. Further, we think substantial synergies will be realized from the recent merger with Nalco. The company is a high-quality defensive franchise that has a history of strong performance amid difficult conditions. Because of its relatively low Beta and high Price Stability score, Ecolab stock is an excellent choice for a hedge against market instability. Over the next three to five years, we expect the quotation to have continued on its slow but steady climb.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.