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Stock Screen: Conservative Stocks - March 26, 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: Lockheed Martin (LMT) and Honeywell International Inc. (HON)
Lockheed Martin is one of the world’s largest defense contractors, providing a broad range of products and services with focus in defense, space, intelligence, homeland security, and information technology, including cyber security. In 2011, 82% of its $46.5 billion in net sales came from the U.S. Government, including 61% from the Department of Defense (DoD). Around 17% of revenues came from international customers (including foreign military sales funded, in whole or in part, by the U.S. Government), and 1% were from U.S. commercial and other customers. Notable programs include the F-16, F-22, F-35, and the Titan launch vehicles.
Lockheed’s most widely known product currently in production is the F-35. Funded under the Joint Strike Fighter program, the plane is designed to meet standard take off, carrier and short landing, and the most difficult of all, short takeoff and vertical landing. Notably, for this particular aircraft, Lockheed’s design beat out that of rival Boeing (BA).
It is no secret why these shares hold our highest rank for Safety. The products and services provided by the company are of vital importance to the United States’ national security. The company receives high marks for Earnings Predictability, largely due to its impressive backlog, which reached $80.7 billion at the end of calendar 2011. Approximately $31.0 billion, or 38%, of that sum is expected to be converted into sales in 2012.
Despite potential cuts to the U.S. Defense Budget, analyst Ian Gendler recently stated that “Lockheed should be able to weather the budgetary storm better than some other defense contractors.” The company recognizes that the resources of its U.S. government customers are constrained, which is why it is extending its product portfolio, with a focus on international and adjacent markets.
Honeywell International Inc.
Honeywell International, a member of the Fortune 100, is a large conglomerate with a workforce of about 132,000. It produces products and services for the consumer, engineering, and aerospace industries, including control, sensing and security technologies for office buildings, homes and industry, automotive products, specialty chemicals, electronic and advanced materials, process technology for refining and petrochemicals, and energy efficiency products. Specifically, some of Honeywell’s most recognizable products are its line of home thermostats and the Garret turbochargers. After a merger with AlliedSignal in 1999, the company consolidated its headquarters to Morristown, New Jersey.
A word that many investors think of when they hear “safety” is diversification. Honeywell has a wide breadth of product and the markets that the company serves are not highly cyclical in nature. That said, it does have some exposure to Europe, but approximately 40% of sales to the Continent should not be affected by the near-term macro uncertainty there. The company is expecting growth in developed regions to moderate in the coming year, but still outpace overall GDP growth thanks to increased penetration and market share gains. A robust commercial Aerospace aftermarket should also help.
The company is also seeing increased adoption of new products. This, combined with a focus on high growth regions like the Middle East, China, and India (sales up 20%) drove record organic growth, free cash flow, and margin expansion in the December quarter. Some notable new business wins include a 15 year, $90 million contract to completely overhaul the technology controlling Los Angeles’ massive waste water treatment system, as well as a smart grid project that will help connect up to 30 commercial and industrial buildings in the Thames Valley area west of London. Further, Honeywell saw growth in deliveries of wheels and brakes to Boeing and Airbus, driven by a ramp in production rates.
With $16 billion in current assets, and a reasonable debt to capital ratio for its size, Honeywell currently holds our highest rating for Financial Strength. In addition, its well-above-average Stock Price Stability score, makes this a great investment for those with a more conservative bent.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.