Value Line assigns Financial Strength ratings across a spectrum from A++ (Highest) to C (Lowest). Generally speaking, the largest companies with the strongest balance sheets get the highest scores. Factors considered in making a rating determination include balance sheet strength, as well as earnings performance, market capitalization, stability of returns, and business outlook, among others.
The Financial Strength rating and a stock’s Price Stability rank are the two main components used to determine Value Line’s proprietary Safety Rank, which measures the total risk of a stock relative to the approximately 1,700 other stocks under Value Line review.
Although a company’s Financial Strength rating is just one factor among many that investors should consider, it is an important one. Moreover, shareholders should take particular note of changes in this rating—both up and down. Value Line subscribers have access to our complete list of Financial Strength upgrades and downgrades each week in the Selection & Opinion section of The Value Line Investment Survey. Noted here, however, are recent upgrades awarded to Dover Corporation (DOV) and Whirlpool Corporation (WHR).
A large-cap diversified global manufacturer, Dover Corporation focuses on innovative equipment and components, specialty systems, and support services. The company operates out of four main segments; Communication Technologies (19% of 2012 sales), Energy (27%), Engineered Systems (42%), and Printing & Identification (12%). Many of Dover’s products are used to support a wide range of growing services and industries, such as consumer electronics, medical technology, aerospace and defense, as well as global telecommunications markets, to name a few. Indeed, diverse operations and broad revenue streams have played a large role in the company’s ability to develop a fundamentally sound balance sheet. Although Dover has a bit of debt (31% of capital), cash on hand, coupled with thriving operational efficiency mitigates our concern.
The stock has been on a tear, rising approximately 300% since early 2009, as per our October report. The company’s financials have rebounded handsomely from that time, improving substantially year over year. As a result, investors have marched the share price higher.
Moreover, acquisitions have helped strengthen top line production over the years by broadening the product mix. This is demonstrated by Dover's two most recent acquisitions, Finder S.p.a (Italy) and SPIRIT. We think the company will continue to implement this strategy in the years to come.
Another comforting sign of sustainability and fundamental illustriousness is Dover’s ability to consistently generate free cash flow. On average, operations generate annual free cash flow of roughly 10% of sales. While capital spending has ticked up of late, ample levels of cash still remain subsequent to dividend payouts and fixed expenditures. This impressive metric ought to be a tailwind for growth going forward, as funds can be used to lower leverage, return value to shareholders, bolster working capital, and fueling investments. On top of that, noteworthy top- and bottom-line growth prospects for the next several years further support our solid viewpoint on the company’s financials. Conservative accounts may wish to take note of the stock’s recent Financial Strength mark upgrade (A++) and good score for Safety (2).
This leading global manufacturer and marketer of home appliances boasts appealing credentials for relatively risk-averse investors. The company’s Financial Strength mark has been raised from A to A+, largely due to a standout bottom-line performance in the second quarter. Furthermore, the stock registers an attractive score for Price Growth Persistence (80), as the share price has soared just under 200% since mid-2012.
The company’s principal products and four main segments include Laundry Appliances (30% of 2012 sales), Refrigerators and Freezers (30%), Cooking Appliances (17%), and Other (23%), which includes dishwashers, mixers, and other portable household appliances. Whirlpool’s wide geographic footprint delivers a strong level of diversification, with product manufacturing taking place in 11 countries and sales in almost every country world-wide. Specifically, geographic segments consist of North America, Latin America, EMEA (Europe, Middle East, and Africa), and Asia. A consistently improving housing market seems to be a common theme across the board for Whirlpool. Undoubtedly, a pickup in the U.S. housing market has helped guide revenues back on track. Elsewhere, a burgeoning middle class has spurred demand for the company’s products in developing regions.
A favorable outlook for top- and bottom-line growth over the long haul ought to underpin our positive fundamental stance on Whirlpool. Alongside management’s guidance increase for full-year 2013, we expect the company to grow revenues and earnings by 3% and 40% this year, and 4% and 20% in 2014, respectively. Solid margins, thanks to improved operational efficiency and lower manufacturing expenses, ought to result in a jump in profitability. Also, we look for free cash flow to be robust in the coming years, even after we factor in possible hikes to the dividend payout and capital expenditures.
While we consider this equity a potential option for those with a more conservative investment approach, investors should note the stock’s somewhat high Beta (1.35), as well as average score for Safety (3), when determining suitability for their portfolios.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.