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Stock Screen: Conservative Stocks - April 30, 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. A couple of interesting stocks that recently made these elite lists include: Eaton Corp. (ETN), and Intuit (INTU).
Eaton is a diversified global power management company and technology leader serving the vehicle, construction, commercial, and aerospace markets. It breaks its operations into five business segments: Electrical (further divided between domestic operations, which were 26% of 2011 revenue, and international operations, 19% of 2011 revenue), Hydraulics (18%), Aerospace (10%), Truck (16%), and Automotive (11%). The company’s products include electrical components/systems for power distribution, quality, and control; hydraulics components for industrial and mobile equipment; aerospace fuel hydraulic and pneumatic systems for commercial and military use; as well as truck and automotive drivetrain & powertrain systems for fuel economy and safety.
The company posted a solid performance during the March quarter, narrowly beating our earnings estimate while its top line came in as expected. We think this augurs well for the annual tally, as the first quarter was likely to be the most-challenging of the year. Indeed, Eaton raised both the lower- and upper- ends of its guidance range for 2012 by a dime, and now looks for share net to land between $4.30 and $4.70. Moreover, management noted that the increase in the earnings outlook derived from fewer shares outstanding, reduced foreign currency headwinds, and a likely lower tax rate. While we are concerned that the sovereign debt problems in Europe could present a hurdle, we think the company has a good year ahead of it.
We think solid demand trends in many of the company’s markets should support good capital appreciation over the pull to 2015-2017. A good dividend yield is another appealing aspect. The issue is particularly well suited for conservative investors, given its high marks for Price Stability and Financial Strength.
Intuit is a technology company focused on providing accounting and business management software to small and medium sized businesses, individuals, and professionals. The Mountain View, California-based company began selling its flagship Quicken software in 1984, to help individuals manage their personal finances. Since then, Inuit has rolled out a number of successful products that have become the leading names in financial software for individuals as well as small and mid-sized business. Outside of Quicken, top products include QuickBooks for simplifying small business management and payroll processing, TurboTax which helps consumers with tax preparation and filing, and ProSeries, Intuit’s leading tax preparation offering for professional accountants.
Intuit recently announced plans to acquire Demandforce, a privately held marketing and customer communications software-as-a-service (SaaS) company out of San Francisco, for $424 million in cash. We like the deal, expected to close at the end of May, as Demandforce’s products should mesh well with Intuit’s small-business offerings, which account for about 40% of the overall top line. The new addition specializes in small-business software that automates scheduling, appointment confirmation, and feedback services, which Intuit’s clients are likely to find useful. The acquisition will likely become accretive to the top line in fiscal 2013, and management expects revenue growth to be boosted by between one and two percentage points as a result.
Intuit has a sturdy balance sheet, with a reasonable debt-to-capital ratio for a technology company. We expect it will continue to deploy these resources for additional acquisitions or to further organic growth. Additionally, we think the recent dividend declaration suggests management expects business to remain robust, while underscoring its commitment to shareholder value. Indeed, the company has about $2.4 billion remaining in its share buy-back authorization through August of 2014, which we anticipate will be fully utilized. Given its strong marks for Price Stability, we like the issue for conservative accounts.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.