5 low-risk, high-quality stocks

These undervalued companies are on firm footing and offer shareholders solid dividends and earnings growth.

By TheStreet Staff Nov 9, 2011 1:39PM

By Scott Rothbort, Stockpickrstockpickr

 

Over the years I have been consistent in the themes I apply to my fundamental research. I tend to focus on earnings growth at a reasonable price, a strong balance sheet and financial condition, and dividends -- though not always at the same time.

 

This week, I'm combining these themes to seek out the best companies that fit the following criteria:

  • Earnings-per-share revisions greater than the S&P 500 ($INX) over the past month. I used the past month because that captured the heart of earnings season.
  • Price-to-earnings ratio less than that of the S&P 500 on a market-capital-weighted average.
  • Standard & Poor's credit rating of BBB or better. I was interested only in investment-grade companies.
  • Dividend yield greater than the S&P 500 dividend yield, which now stands at about 2.2%.

The search, using the Bloomberg Professional Service, yielded 14 results based on those criteria. To refine that list, I decided to apply some disciplined analysis over and above those results.

 

The first decision that I made was to exclude financial stocks because, as we have seen, with sovereign debt, banks, broker-dealers (witness what just happened with MF Global), insurance companies and other financial institutions, the credit-ratings agencies have a poor track record and are unreliable.

 

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I then carefully went through to ensure the accuracy of the data points, double-checking with other informational sources such as Telemet Orion, Yahoo Finance and company financial reports. This process knocked out nine companies from the search results. Let's take a closer look at the following five high-quality stocks at reasonable valuations.

 

1. Intel (INTC)

2010 Actual EPS: $2.05

2011 EPS Estimate: $2.45

2011 EPS Revisions 47

Current P/E Ratio: 9.7

Dividend: 3.5%

S&P Credit Rating: A+

 

Intel is the world's leading semiconductor manufacturer. While sales of personal computers are no longer a huge growth factor for Intel, the boom in mobile computing devices is propelling future growth for the company. Furthermore, Intel's engineering has allowed it to maintain and expand its technological advantage over competitors such as Advanced Micro Devices (AMD).

 

Recently, Intel reported third-quarter earnings of 65 cents, which was better than consensus estimates of 61 cents. This resulted in upward full-year EPS consensus revision of 9 cents for the company from 47 analysts. For the fourth quarter, analysts expect Intel to earn 69 cents, which is 4 cents more than it was a month ago.

 

2. Norfolk Southern (NSC)

2010 Actual EPS: $3.98

2011 EPS Estimate: $5.32

2011 EPS Revisions 26

Current P/E Ratio: 13.8

Dividend: 2.3%

S&P Credit Rating: BBB+

 

Norfolk Southern, along with CSX (CSX) and Union Pacific (UNP), are the three largest publicly-traded commercial railroads in the U.S. after Burlington Northern's acquisition by Warren Buffett'sBerkshire Hathaway (BRK.B). Railroads are increasingly important in the shipment of raw materials and finished goods within our nation and to the coasts for transportation to our many shipping partners, especially in Latin America, Europe and the Far East.

 

Recently, Norfolk Southern reported third-quarter earnings of $1.59, beating consensus estimates of $1.41. This resulted in upward full-year EPS consensus revision of 19 cents for the company from 26 analysts. CSX and Union Pacific did not fare as well when it came to third-quarter earnings performance and upward revisions. For the fourth quarter, analysts expect Norfolk Southern to earn $1.38 -- 5 cents more than a month ago.

 

3. Time Warner (TWX)

2010 Actual EPS: $2.41

2011 EPS Estimate: $2.79

2011 EPS Revisions 11

Current P/E Ratio: 12.3

Dividend: 2.7%

S&P Credit Rating: BBB

 

Time Warner is one of the premier media content providers in the world, operating in three segments: filmed entertainment, TV/cable networks and publishing. Among its highly recognizable brands are HBO, Cinemax, CNN, TBS, TNT, Sports Illustrated, People, Fortune, Warner Brothers and New Line Cinema.


Long known for one of the worst mergers and acquisitions of all time with the original America Online (AOL), the company has had to trim itself by cutting debt, focusing on cash flow and spinning off companies.

 

Time Warner Cable (TWC) was spun off in its entirety in 2009; prior to that it was a tracking stock of which Time Warner held an 84% stake. As part of that spinoff, Time Warner offloaded a considerable amount of long-term debt (an estimated $20 to $22 billion) onto Time Warner Cable's balance sheet. Now the more svelte Time Warner can operate as a cash cow, paying off more debt, repurchasing stock and paying a dividend. I expect a dividend increase in early 2012.

 

The rapid emergence of digital delivery of content will no doubt favor the content providers in the future, which will work to Time Warner's advantage.

 

Time Warner reported earnings of 79 cents, which was better than consensus estimates of 76 cents. This resulted in upward full-year EPS consensus revision of 1 cent for the company from 11 analysts. For the fourth quarter, analysts expect Time Warner to earn 86 cents, which is unchanged from a month ago but 2 cents more than two months ago.

 

4. General Dynamics (GD)

2010 Actual EPS: $6.82

2011 EPS Estimate: $7.23

2011 EPS Revisions 16

Current P/E Ratio: 8.8

Dividend: 3%

S&P Credit Rating: A

 

General Dynamics is a global aerospace and defense contractor. The company consistently beats analysts' consensus estimates and generates high single-digit to low double-digit earnings growth.


While budgetary concerns in Washington, D.C. may lead one to believe that General Dynamics may feel the fiscal pinch, I think that may be a naive generalization. With the Arab Spring continuing into the Arab Fall and likely beyond, continued problems in Afghanistan, piracy on the high seas and the increasing military needs of nations with emerging economies, General Dynamics should continue to generate reasonable earnings growth.

 

Selling 8.78 times 2011 estimates and 8.39 times forward estimates with a near-3% dividend, this company's shares are quite reasonably valued. Recently, General Dynamics reported third-quarter earnings of $1.83, which was better than consensus estimates of $1.77. This resulted in upward full-year EPS consensus revision of 4 cents for the company from 16 analysts. For the fourth quarter, analysts expect GD to earn $1.98, which is 3 cents greater than it was a month ago.

 

General Dynamics, one of the top-yielding aerospace and defense stocks, shows up on a recent list of 10 top stock picks from Morgan Stanley.

 

5. Hubbell (HUB.B)

2010 Actual EPS: $3.59

2011 EPS Estimate: $4.31

2011 EPS Revisions 7

Current P/E Ratio: 13

Dividend: 2.5%

S&P Credit Rating: A

 

Hubbell is a global manufacturer and distributor of electrical and electronic products for commercial and residential construction. You might think that Hubbell is in the wrong business given the depressed nature of the housing and commercial real estate industry in the U.S., but that would be short-sighted. The company returned robust results both during the construction boom and after its bust.

 

Recently Hubbell reported third-quarter earnings of $1.37, which was better than consensus estimates of $1.28. This resulted in upward full-year EPS consensus revision of 9 cents for the company from seven analysts. For the fourth quarter, analysts expect Hubbell to earn $1.09, which is 3 cents greater than it was a month ago.

 
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