6/6/2012 8:23 PM ET|
5 up-and-coming blue-chip stars
Smaller than the big names you're used to hearing, these midsize companies dominate their industries nonetheless.
When you think of blue-chip stocks, big, brand-name companies such as Coca-Cola (KO), McDonalds (MCD) and Johnson & Johnson (JNJ) come to mind. But John Fox, co-manager of the FAM Value (FAMVX) fund and director of research at Fenimore Asset Management, the fund's sponsor, unearths what he calls "rising blue chips" -- midsize companies that dominate their industries and have a global reach.
"They're smaller than IBM and Proctor & Gamble, but they're blue chips in a lot of ways," Fox says.
These midsize dynamos share other characteristics with the best blue chips: a proven business, exceptional free cash flow (earnings and depreciation, minus capital expenditures) and skilled managers who use their company's capital to enrich shareholders.
Following are five Fox favorites worth watching. He holds all of them in FAM Value, but he is not adding to his positions at current prices. They're quality companies, but he'd buy on pullbacks.
Market capitalization: $5.5 billion
Percentage of sales from outside the U.S.: 60%
When it comes to air filters, the trucking industry turns to Donaldson (DCI). The Minneapolis company makes air filters primarily for trucks and industrial equipment, such as tractors and bulldozers, for big-name customers such as Caterpillar (CAT) and Deere (DE). The filters, which reduce the pollution released by these vehicles, are also used in mining equipment and gas turbines. Donaldson has a lock on this business, which produces a steady stream of income because filters wear out and need to be replaced regularly.
International expansion is likely to drive Donaldson's growth in the future. The company is building a new manufacturing plant in Mexico, which will help it meet strong demand in Latin America, and it has a number of gas-turbine projects under way in the Middle East and China, not to mention the United States.
Donaldson's earnings increased at a nearly 12% annualized clip over the past five years. They are projected to rise nearly 13% per year over the next three to five years, thanks to strong demand for trucks (many of which use Donaldson filters) in emerging markets. (Company data calculated as of the May 29 close.)
Market capitalization: $7.6 billion
Percentage of sales from outside the U.S.: 40%
Open your cabinet and check out the brand name on your spice jars. Chances are good they say McCormick (MKC).
The Sparks, Md., company controls the largest share of the market for spices and food flavorings, and with anticipated earnings growth of 9% annually, its shares make a tasty investment. For busy families, McCormick sells recipes coupled with spices pre-mixed in the right quantities. All you have to do is buy the meat, mix in the spices and cook.
Meanwhile, the company's recent acquisition of a Polish mustard company and a joint venture with a rice company in India should keep sales growing at a nice clip. McCormick also pays a $1.24 per share annual dividend, up 51% from five years ago. The stock yields 2.2%.
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