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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 Summary & Index section of The Value Line Investment Survey, that cull out stocks earning the 1 (Highest) Safety Rank and the 2 (Above Average) Safety Rank (presented as two separate screens). Out of this list, we chose only to include stocks in industries that produce consumer products and services. To narrow our selection down further, only companies with long-term debt to capital ratios below 25% made the cut.

The list of stocks that made the cut can be seen below. From there we have chosen to highlight two stocks: Panera Bread Company (PNRA) and The Procter & Gamble Company (PG - Free Procter & Gamble Stock Report).

Panera Bread Company

 Panera Bread Company, which operates under the Panera Bread, Saint Louis Bread Co., and Paradise Bakery & Café brand names, operates 1,708 bakery-cafés (835 are company-owned and 873 are franchise-operated) in the United States and Canada. Serving roughly 7 million customers per week, it is considered one of the largest food service companies in the U.S. Panera’s business is separated into three core operating segments (as of June 25th): Bakery-café operations (88.5%), fresh dough and other product operations (6.9%), and franchise operations (4.7%).

The company has posted impressive top- and bottom-line gains in the past and 2013 should be another record year. Company-owned comparable bakery-café sales have increased nearly 11% on a two-year basis (franchised-operated advanced more than 8%). That said, same-store sales growth was weaker than expected in the June interim, and has moderated over the past year, causing management to lower its earnings guidance. This news has put pressure on the stock price of late.

Nonetheless, management’s plan for long-term top and bottom line growth is encouraging. Key initiatives include new menu items, faster service from more-efficient kitchen display systems and floor plans, square footage expansion, simplifying food production, and improving IT infrastructure. The changes should bolster traffic and sales, especially during peak hours.

 Panera holds our highest Safety rating, thanks largely to its debt-free balance sheet, favorable cash position, good Price Stability score, and a below-market Beta coefficient. All told, these shares are well suited for conservative investors, particularly those with a long-term perspective.

The Procter & Gamble Company

Procter & Gamble provides branded consumer packaged goods to consumers in more than 180 countries. For fiscal 2013 (ended June 30th), international sales made up 61% of revenues, with the United States and Canada totaling 39%. Its products are sold to various customers, from grocery and drug stores to membership clubs and mass merchandisers. Specifically, Wal-Mart (WMT- Free Wal-Mart Stock Report) accounted for 14% of total sales. Its most notable brands (or “billion dollar brands”) are separated under its Global Business Unit structure and include Head & Shoulders, Gillette, Crest, Downy, and Bounty, among others. There are five reportable industry-based segments (changed on July 1st): Beauty; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care.

Procter posted year-over-year top- and bottom-line gains in fiscal 2013, as it has over the past several years. Although the size and nature of P&G’s business limits its revenue growth potential, we think earnings growth will remain strong, thanks largely to the company’s ongoing global restructuring program.

In an effort to “maintain a competitive cost structure,” PG started significantly reducing the size of its workforce last year. It recently reported giving severance packages to 3,450 and 3,300 employees in fiscal years ended June 30, 2013 and 2012, respectively. Cuts have been spread across its global units, and another 2%-4% of its workforce is expected to go this year. Total cost of the program should sum to around $3.5 billion and continue through fiscal 2016. So far, approximately 55% has been paid. The company believes the restructuring will create $10 billion in savings over the five year period. The activity ought to drive much of the 5%-7% EPS growth expected in fiscal 2014, as sales should only be up around 1%-2%.

Additionally, the company may face various headwinds, such as weaker underlying market growth, a stronger U.S. dollar, higher commodity costs, and a competitive pricing environment.

Overall, we think this blue chip is a good selection for conservative, income-seeking accounts. In addition to solid prospects for earnings growth, the stock carries a low Beta coefficient and has top scores for Safety, Financial Strength, and Price Stability.

 

Company

Ticker

Industry Name

V.F. Corp.

VFC

Apparel

Boston Beer 'A'

SAM

Beverage

Disney (Walt)

DIS

Entertainment

Hormel Foods

HRL

Food Processing

J&J Snack Foods

JJSF

Food Processing

Nestle SA ADS

NSRGY

Food Processing

Tootsie Roll Ind.

TR

Food Processing

Church & Dwight

CHD

Household Products

Lancaster Colony

LANC

Household Products

Procter & Gamble

PG

Household Products

WD-40 Co.

WDFC

Household Products

CVS Caremark Corp.

CVS

Pharmacy Services

Walgreen Co.

WAG

Pharmacy Services

Panera Bread Co.

PNRA

Restaurant

Starbucks Corp.

SBUX

Restaurant

Bed Bath & Beyond

BBBY

Retail (Hardlines)

Ross Stores

ROST

Retail (Softlines)

TJX Companies

TJX

Retail (Softlines)

Fastenal Co.

FAST

Retail Building Supply

Tractor Supply

TSCO

Retail Building Supply

Costco Wholesale

COST

Retail Store

Dollar Tree, Inc.

DLTR

Retail Store

Village Super Market

VLGEA

Retail/Wholesale Food

Weis Markets

WMK

Retail/Wholesale Food

NIKE, Inc. 'B'

NKE

Shoe

 

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