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Stock Screen: Conservative Stocks - February 27, 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 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). This alleviates the need to rummage through on a stock-by-stock basis, trying to find the most conservative issues. A couple of interesting stocks that recently made these elite lists include: ConAgra Foods (CAG) and Eastman Chemical (EMN)
ConAgra Foods is one of North America’s leading food companies. Its Consumer Foods unit (63.1% of total sales) includes branded, private label, and customized food products that are sold in various retail and foodservice channels. Its 2012 product category breakdown was as follows: grocery, 25.3% of total sales; frozen 15.0%; snacks, 9.3%; international, 6.3%; store brands, 4.8%; and other brands, 2.4%. The Commercial Foods unit (36.9%) provides foodservice, food manufacturing, and industrial customers with specialty potatoes (19.8% of total sales), milled products (13.6%) and seasonings, blends, and flavors (3.5%). Major brands include but are not limited to: Healthy Choice, Hunt’s, Marie Callender’s, Orville Redenbacher’s, PAM, Reddi-wip, Swiss Miss ,and Chef Boyardee. Wal-Mart (WMT - Free Wall-Mart Stock Report) is the company’s largest customer, accounting for 17% of total sales.
Substantial bottom line growth appears likely for ConAgra. Recent innovations in the frozen food category like steaming and baked-in-the-microwave technologies ought to benefit from consumers’ increased focus on healthy eating habits. New products from recently acquired brands like Bertolli and P.F. Chang's are expected to appeal to the high-end demographic. The Marie Callender's brand has achieved a CAGR of 19% over the last three years, thanks largely to innovation (frozen pies) and effective marketing. The company has also had success growing established brands. For example, sales of Reddi-wip have been bolstered by marketing that highlights the product line's usefulness beyond the holidays.
We expect the recent purchase of Ralcorp Holdings to be accretive to earnings this year. That business will likely increase CAG’s annual private label sales from $1 billion (7% of 2012 sales) to $4.5 billion (25% of estimated 2013 sales), and make it the largest private brand maker in North America. ConAgra is still working on integrating Ralcorp into the larger business, so its positive effect on this year’s bottom line may be limited. Still, by 2014, earnings should be around $0.25 higher thanks to this private brand powerhouse.
The company plans to substantially reduce its share repurchase activities over the next two- to three-year period so it can focus on reducing its debt by $1.5 billion. Although the board recently raised CAG's quarterly dividend payout to $0.25 a share (current yield is 3%), we don’t anticipate further hikes while it shores up the balance sheet. Management plans to limit near-term acquisition activity but will continue to pursue investments to enhance innovation and product capability.
The solid Financial Strength of this company, coupled with high scores for Timeliness, Safety, and Price Stability make ConAgra an appealing selection in our view. Also, long-term prospects are encouraging out to 2016-2018. In all, income investors with a conservative bent may want to take a look at these shares.
Eastman produces a wide range of specialty chemicals used in a number of growing industries. Key products include industrial paints and coatings, packaging inks, adhesives, tobacco filters, consumer goods packaging, as well as intermediate chemicals for agriculture, transportation, beverages, nutrition, building and construction, pharmaceuticals, coatings, medical devices, toys, photographic and optical films, and liquid crystal displays. Due to the broad nature of its product portfolio, and the fact that 50% of its sales come from overseas, the company’s performance is greatly influenced by global economic output. Eastman’s five segments include: Additives & Functional Products, 25% of operating profit; Fibers, 24%, Specialty Fluids & Intermediates, 22%; Adhesives & Plasticizers, 16%; Advanced Materials, 13%.
On July 2, 2012, Eastman completed the $4.8 billion acquisition of Solutia Inc., a global leader in performance materials and specialty chemicals. The purchase marked the largest in company history. The motives for the buyout were to expand its global presence (particularly in Asia), generate revenue synergies via complementary technologies, and create a more diverse and sustainable product portfolio. The company ended 2012 with cost synergies from the acquisition reaching a $50 million run rate, and it expects to save $100 million in 2013.
With Solutia in the fold, fourth quarter earnings jumped 50% year over year, as lower raw material and energy costs more than offset reduced selling prices, and almost every segment showed year over year growth. This drove the operating margin up 320 basis points. At present, the company expects EPS growth of 17% and 19% in 2013, which may prove conservative if global GDP growth surpasses expectations. Furthermore, in December, the board increased the dividend payout (which is currently yielding 1.75%) by 15%. This was Eastman’s third increase in two years and further hikes appear likely.
The company’s unique portfolio of specialty chemicals positions it to do well even when economic conditions are less than stellar. Eastman receives above average ranks for Timeliness, Safety, and Financial Strength. The recent stock price decline may serve as a good entry point for conservative investors.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.