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This week we are focusing our attention on companies that have established strong track records for steadily increasing profits. We started by screening for companies that have delivered average annual earnings growth of at least 10% in their last full fiscal year and over the past five years. Out of this group, we then examined our long-term profit projections to identify those that appear poised to extend this favorable track record over the next 3 to 5 years. (Once again, we set the bar at 10% for average annual share-net gains out to 2016-2018.) Only about one-in-10 of the roughly 1,700 companies in our universe managed to meet these stringent criteria. 

Not surprisingly, the stocks of many of these companies are in high demand with investors. Still, we did identify a number that appear to trade at modest valuations. Specifically, about 40 of these equities have P/E ratios of 16.0 or less, which would represent a 10%-plus discount from the broader market multiple of 18.0. The last time we ran this screen we opted to focus on lower-risk holdings—Safety ranks of 1 (Highest) or 2 (Above-Average)—that were likely to appeal to more-conservative investors. This time we switched our emphasis to 3- to 5-year price appreciation potential. We set the bar at 60%, double the current median of 30% for the Value Line universe. The 13 stocks below made the cut and are likely worthy of consideration by those seeking investment ideas for buy-and-hold portfolios.    

Company Ticker
Apple Inc. AAPL
Aegion Corp. AEGN
Cameron Int'l Corp. CAM
Cirrus Logic CRUS
DIRECTV DTV
Dresser-Rand Group DRC
Lindsay Corp. LNN
MasTec MTZ
National Oilwell Varco NOV
Smith & Wesson Hldg. SWHC
TeleTech Holdings TTEC
Titan Int'l TWI
Nautilus Inc. NLS

Out of this group we have chosen to highlight National Oilwell Varco (NOV), a leading provider of drilling equipment for the oil and gas industry. The company’s biggest business is rig technology. In 2012, these operations, which include drilling and workover rigs, cranes, and mooring systems, generated about half of National Oilwell Varco’s revenues and a bigger chunk of its operating profits (about 60%). The petroleum services and supplies division, which offers drill pipe, pumps, and pipeline inspection, is the other key revenue and earnings driver.

Despite the impressive earnings growth shown in recent years and the promise of healthy gains into the second half of the decade, it is not always smooth sailing for the companies on the list above. A handful, in fact, are now facing some challenging times. National Oilwell is among the four that appear likely to suffer profit setbacks in their current fiscal years. (Cirrus Logic (CRUS), Lindsay Corp. (LNN), and Titan International (TWI) are the others.) Already, NOV has posted three consecutive quarters of negative earnings comparisons, and we look for full-year share net to decline about 5% in 2013, to $5.50. Increased competition and falling rig counts are two of the factors behind the recent rough patch. Softness in the North American onshore market will likely remain a headwind over the next several quarters, but should not prevent the company from getting earnings back on a growth track in 2014. In all, we expect the bottom line to rebound 16% next year, to $6.40.

Meanwhile, Houston-based NOV is now undergoing a bit of a transition period. Clay Williams, the current President and COO, was recently tabbed to become the company’s new CEO and chairman. Merrill (Pete) Williams has filled these roles for the past dozen years, but he intends to step down when NOV completes the spinoff of its Distribution business. These operations, which provide maintenance, repair and operating supplies to the global energy and industrial markets, is set to go its own way in the first half of next year. Bolstered by acquisitions, this division’s revenues and operating profits have risen sharply in the past year, and management believes it now has the market size and scale to flourish on its own. 

Overall, National Oilwell stock looks to be a worthwhile option for investors focused on 3- to 5-year price appreciation potential. As noted, the company has a strong track record for earnings growth and, even with the recent bumps in the road, its prospects looking into the second half of the decade appear bright. In fact, we look for annual share net to be pushing past $9.00 by 2016-2018. This, combined with the reasonable valuation at which the stock currently trades, suggest healthy upside for patient investors. Still, this equity isn’t necessarily for everyone. It is only an Average selection (3) for Safety, which may be a concern for more-conservative accounts. The company’s finances are in strong shape—debt is below $4 billion, compared to a market capitalization of more than $30 billion—but the stock, like many in commodity-sensitive industries, can be somewhat volatile. Meanwhile, income-oriented investors aren’t likely to be unimpressed by the dividend, which provides a yield of 1.2%, little more than half of the current Value Line median (2.0%). On the positive side, NOV has steadily increased the dividend in recent years, and the modest payout ratio (about 15% this year) suggests further hikes are well within its means.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.