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This screen is designed for investors seeking stocks with worthwhile long-term appreciation potential and low-to-moderate risk. We began by screening for companies where share earnings have compounded at a minimum 10% annual rate over the past five years and that are expected to at least maintain a 10% annual growth rate over the next three to five years.

Next, we limited the list to stocks with price appreciation potential of 60%, or more, over the next three to five years, measured from the mid-point of each issue’s projected Target Price Range. Companies scoring Below Average for Safety were excluded. We also required that each company have a Financial Strength rating of B+ or better. Of the list of stocks that meet those criteria (see below), we believe TRW Automotive (TRW) and Oil States International, Inc. (OIS) warrant a closer look.

TRW Automotive Holdings

 TRW Automotive Holdings is the leading supplier of automotive systems, modules, and components to automotive original equipment manufacturers (OEMs) and related aftermarkets, primarily in Europe, North America, and Asia. Its major customers include Volkswagen, Ford (F), Chrysler, and GM (GM). Indeed, the company’s active and passive safety-related products and systems are comprised of four separate segments. Chassis Systems, which encompasses modules, steering gears and systems, foundation brakes, brake controls, and linkage and suspension (accounted for 63% of 2012 revenues); Occupant Safety Systems, such as airbags, seat belts, and steering wheels (20%); Automotive Components, which involves body controls, engine valves, and engineered fasteners and components (11%); and Electronics, which consists of safety, chassis, radio frequency and powertrain electronics, as well as driver assist systems (6%).

The company has faced some headwinds of late due to unfavorable automotive industry conditions in Europe, particularly Western Europe. Weak demand, inventory destocking, and lower global vehicle production in the second half of 2012 are all contributing factors to this dismal environment.  Consequently, management implemented restructuring plans and cost containment initiatives in order to realign capacity and costs to the current environment, as these obstacles appear likely to persist over the next several months.

Despite these challenges, the company is well positioned to benefit from various growth opportunities over the next three to five years, assuming industry trends in Europe improve. TRW’s ability to satisfy vehicle safety, fuel efficiency, and affordability demands should be a growth catalyst over the long haul. Governments and vehicle manufacturers have implemented stricter safety regulations, which will likely become more stringent down the road. This augurs particularly well for TRW’s electronics segment, especially its driver assist systems. Investments in additional advanced safety technologies, such as its pedestrian protection systems, adaptive side airbags, integrated electronic stability control, and next-generation camera and radar systems, should further strengthen its hold on the market. We expect these investments to result in new business wins, and will likely begin to bear fruit in 2014 and 2015.

Due to the company’s strong cash position, the board of directors authorized a $1 billion share-repurchase program, during the third quarter of 2012.  These buybacks will occur over a two-year period. Indeed, management plans to accelerate this activity during the year, with estimated repurchases totaling roughly $500 million in 2013. Stock repurchases should lend support to share earnings over the next few years. Vehicle production growth in emerging markets, including China and Brazil, should drive bottom-line growth, as well.

All told, this issue carries its fair share of risk, which is reflected in its above-market Beta coefficient and volatile stock price movements. Management also expressed concerns of moderating growth in North America and its exposure to ongoing deterioration in Europe. Nonetheless, we like the potential for long-term earnings growth driven partly by higher safety regulation.  –Michelle Jensen 


Oil States International, Inc.

Oil States International, Inc. provides products and services to natural resources companies operating in many of the world's active oil, natural gas, and coal producing regions, including Canada, onshore and offshore U.S., Australia, West Africa, the North Sea, South America and Southeast and Central Asia. Its customers include national and independent oil, natural gas, and mining companies, and onshore and offshore drilling outfits. Its four core operating segments include Accommodations (52% of 2012 EBITDA), Offshore Products (deepwater capital equipment 16%), Well Site Services (completion & drilling, 24%), and Tubular Services (casing and tubing used in the drilling and completion of oil and natural gas wells 8%).

Oil States is the largest third-party remote site accommodations provider in the markets it serves. It does everything from site prep and installation to long-term catering and facilities management. More than two-thirds of its accommodations revenue is generated by large-scale lodge and village facilities located near Canadian oil sands and Australian coal mining sites. In 2012, room additions (net of retirements) increased 14% year over year. In 2013, this growth rate is expected to drop to 6% to 7% due to crude oil price differentials between Western Canadian Select and West Texas Intermediate varieties that have been delaying some large mining investment (Canada should make up two-thirds of 2013 room growth). Increased steam-assisted gravity drainage drilling (SAGD) ought to partially offset this. Further, although coal pricing in Australia weakened in the fourth quarter of 2012, there has been a bit of a rebound recently, and iron ore prices are doing better as well. Further improvement here would likely cause the company’s estimates to prove conservative. Visibility into future revenue is strong considering 84% of rooms currently in operation are committed to contracts through 2013, and 58% are locked in through 2014. We like the company’s Accommodations business model and think it will prove successful in broadening its commodity exposure over time.

In the offshore space, OIS is enjoying historically high levels of backlog. Bidding and quoting has been favorable in high-growth regions such as Brazil, West Africa, Southeast Asia, and Australia. Indeed, the outlook for additional floating production facilities is strong. According to multiple third-party estimates, development spending over the next five years will probably be twice as high as the previous five years.

The company also provides personnel and equipment that are integral to the completion of a well. It ought to benefit from more horizontal drilling activity and a rise in the number of drilling zones. The company’s proprietary technology can lower completion costs by saving time. Although activity fell in 2012, margins remained stable, implying that OSI’s products are differentiated and sophisticated enough to not require discounting when demand weakens. Although the North American rig count fell in the fourth quarter, management expects this important indicator to stabilize, and its current guidance is fairly conservative.

Oil States International shares are not without risk. Mainly, exposure to North American rig counts and Canadian oil sand prices may dissuade more conservative investors from jumping in. However, those willing to take on more risk may be rewarded by the strong growth prospects of the well-run accommodations unit and rapidly increasing offshore drilling activity. –Kevin Downing

 

 Company

Ticker

Laboratory Corp.

LH

Apple Inc.

AAPL

Google, Inc.

GOOG

Agrium, Inc.

AGU

Amazon.com

AMZN

Dillard's, Inc.

DDS

Ensco plc

ESV

IntercontinentalExch.

ICE

Oil States Int'l

OIS

priceline.com

PCLN

Rio Tinto plc

RIO

Siemens AG (ADS)

SI

TRW Automotive

TRW

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