The 100 Best Stocks You Can Buy 2012 Part 10

Health care reform and related spending slowdowns may cut into demand for some of Baxter's products. The company has at times had problems with some of its products, leading to recalls and softened demand.

CONSERVATIVE GROWTH.

Becton, d.i.c.kinson and Company.

Ticker symbol: BDX (NYSE) S&P rating: AA- Value Line financial strength rating: A++ Current yield: 2.0%.

Company Profile.

Becton, d.i.c.kinson is a global medical technology company broadly focused on improving drug delivery, enhancing the diagnosis of infectious diseases and cancers, and advancing drug discovery. The company develops, manufactures, and sells medical supplies, devices, laboratory instruments, antibodies, reagents, and diagnostic products through its three segments: BD Medical, BD Diagnostics, and BD Biosciences. These products are sold to health care inst.i.tutions, life science researchers, clinical laboratories, the pharmaceutical industry, and the general public. International sales account for about 56 percent of the total. BD is a familiar brand both for observant patients in clinics, medical offices, and hospitals and for the nursing and medical community.

The company operates in three worldwide business segments: Medical (51 percent of FY 2010 sales), Biosciences (32 percent), and Diagnostics (17 percent).

The Medical segment produces a variety of drug delivery devices and supplies, including hypodermic needles and syringes, infusion therapy devices, intravenous catheters, insulin injection systems, regional anesthesia needles, and pre-fillable drug-delivery systems for pharmaceutical companies.

BD Diagnostics offers system solutions for collecting, identifying, and transporting blood and other specimens, as well as instrumentation for a.n.a.lyzing these specimens. Testing systems include those for s.e.xually transmitted diseases, microorganism identification drug susceptibility, and certain types of cancer screening. The business also provides customer training and business management services.

BD Biosciences provides research tools and reagents to accelerate the pace of biomedical discovery. Clinicians and researchers use BD Biosciences' tools to study genes, proteins, and cells to understand disease, improve technologies for diagnosis and disease management, and facilitate the discovery and development of new therapeutics.

Financial Highlights, Fiscal Year 2010.

In a year of difficult compares because of the H1N1 scare in the prior year, the company reported basically flat revenues and slightly increased earnings (3.6 percent) for FY2010. Comparisons were also difficult because of the divest.i.ture of the Ophthalmic Systems, surgical blades, critical care, and extended dwell catheter businesses during the year, which netted a one-time gain but took approximately $200 million in revenue and $0.20 per share away from earnings. The published numbers reflect these changes, and the company has been making some other small acquisitions and resource commitments to fill the gap in a manner more aligned with the company's overall strategy. The company also announced an aggressive continuation of share repurchase activities, targeting $1.5 billion in buybacks in 2011 and $600 million in 2012.

Reasons to Buy.

Becton, d.i.c.kinson continues to be as recession-proof as any stock on our list, while also offering decent growth potential, especially in earnings, cash flow, and dividends. The company has achieved double-digit growth in earnings, cash flow, dividends, and book value for the past ten years, and revenue growth has only slightly missed that mark. Operating margins have steadily improved from about 25 percent ten years ago to about 30 percent currently. The company is well branded and well established in all of its markets, and it offers a solid way to play the long-term "health" of the health care industry. Share repurchases planned for 2011 and 2012 account for almost 10 percent of share float, a healthy figure. In this case, we think they suggest an above-average cash flow generation rather than a dearth of investment opportunities.

Reasons for Caution.

Continued uncertainty surrounding the health care issue in the United States has to be considered when looking at any stock in this sector. Due to the basic and necessary nature of the bulk of their product line, we feel BD is well positioned to sail though these waters without getting swamped, but a re-evaluation of BD would make sense once the policy issues have been settled. There is also a general softening in elective and postponable medical procedures in response to the recession; it is still unclear whether these procedures will return to full volume any time soon.

Aggressive Growth.

Bed Bath and Beyond Inc.

Ticker symbol: BBBY (NASDAQ) S&P rating: BBB Value Line financial strength rating: A++ Current yield: Nil.

Company Profile.

Founded in 1971, Bed Bath & Beyond (BB&B) and its subsidiaries sell a wide a.s.sortment of goods, primarily domestics merchandise and home furnishings, but including food, giftware, health and beauty care items, and infant and toddler merchandise. With over 1,100 stores in the United States, Canada, and Mexico, the company has strong geographic coverage and a growing web presencetheir goal is to be the customer's first choice for the merchandise categories offered. BB&B competes on the breadth and depth of its product offerings, its focus on the home and personal care, its customer service, new merchandise offerings, and low prices.

The company also owns (through acquisition) and operates three other retail chain concepts. Its CTS (Christmas Tree Shops) chain counts sixty-one stores in fifteen states. There are forty-five Harmon stores in three states, and twenty-nine buybuy BABY stores in fourteen states. Additionally, the web presence has grown through BB&B's own website and emerging separate sites for buybuy BABY and Harmon FaceValues Discount Health & Beauty sites. The latter in particular is worth a glance at www.facevaluesonline.com.

The buybuy BABY stores offer over 20,000 products for infants and toddlers, including cribs, dressers, car seats, strollers and highchairs, feeding, nursing, bath supplies, and everyday consumables, as well as toys, activity centers, and development products. The stores are equipped with private feeding and changing rooms and offer home delivery and setup on everything they sell.

Founded on Cape Cod in 1970, Christmas Tree Shops is a value-priced retailer of home decor, giftware, housewares, food, paper goods, and seasonal products. The stores specialize in low-cost merchandise with frequent changes in mix to generate continued interest.

These specialty stores thus far account for only a small portion of revenue and profits, although company doc.u.ments don't break the percentage down specifically. The company is also dabbling in international markets, with stores in Canada and Puerto Rico. In addition, the company is a partner in a joint venture that operates two stores in the Mexico City market under the name Home & More.

Financial Highlights, Fiscal Year 2010.

Boosted by the economic recovery and what we perceive to be effective management, the company achieved solid top line and especially bottom line growth during 2010 and early 2011.

Top line same-store sales grew at a 7 percent clip and were expected to continue that pace through 2011. Effective cost management resulted in an even faster growth in earnings. A reduction in SG&A from 28.7 percent to 27 percent of sales spurred a return of overall operating margins to 16 percent, up from just under 12 percent during the recession and closer to what was experienced during the economic boom.

Even more enticing is the company's aggressive share repurchase program, which reflects the strong cash and cash generation position it enjoys. The company repurchased 5 million shares in late 2010 and authorized a new $2 billion share repurchase program during that period, representing nearly 20 percent of its outstanding market capitalization. From 2004 through the fiscal third quarter of 2010, BB&B has returned approximately $2.6 billion to shareholders through share repurchases.

Reasons to Buy.

Occasionally a retailer hits on a formula that works, and this one works well in its market and among other market partic.i.p.ants. On the upper end are specialty shops like Restoration Hardware and Williams-Sonoma, competing on "fancy" with strong merchandising and shopping experiences but with high prices, relatively limited selection, and difficult mall access; at the low end lies Wal-Mart and others with a.s.sortments of name brand goods at low prices, but perhaps not such a complete a.s.sortment. BB&B fills the gap, stocking more products per category than its compet.i.tors and arranging its stores so as to emphasize the number of products per category. The BB&B format has not yet reached saturation levels, as there appears to be room for another 500 stores in the United States and Canada. The company's move into other formats, buybuy BABY in particular, comes along at just the right time, as BB&B is generating more than enough cash to fund its own expansion. The company plans to take CTS and buybuy BABY nationwide, and looks to be able to fund the expansion with free cash flow.

The exit of Linens 'N Things from the market in 2009 continues to benefit the company, and we continue to like BB&B's position in the market. The specialty stores and international markets give the company ample growth room in addition to its own branded stores. Finally, we like the management focus on profitability and shareholder value as demonstrated through the share repurchases. The Value Line "A++" financial strength rating is unusual for a retailer and a company with BB&B's growth potential.

Reasons for Caution.

Two cautions that dog all specialty retailers: first, the concept may tire and get stale; consumers are fickle and may move on to something else. Second, a new compet.i.tor, not yet present on the horizon, may emerge to facilitate this process, much as Lowe's did to Home Depot several years back. Investors should consistently reaffirm this company's dominance in its niche.

Aggressive Growth.

Best Buy Company.

Ticker symbol: BBY (NASDAQ) S&P rating: BBB- Value Line financial strength rating: A Current yield: 1.8%.

Company Profile.

Best Buy is a multinational retailer of technology and entertainment products and services with 3,800 stores in the United States, Canada, Europe, China, Mexico, and Turkey. The company's retailers include Best Buy, with about 1,081 of the familiar "big-box" outlets in the United States, as well as Best Buy Mobile, Audiovisions, The Carphone Warehouse, Future Shop, Geek Squad, Jiangsu Five Star, Magnolia Audio Video, Napster, Pacific Sales, and The Phone House. The company has 180,000 employees working through retail locations, call centers, and websites, and providing in-home solutions and product delivery.

Founded in 1966, Best Buy's product portfolio is dominated by consumer electronics (about 40 percent) and home office products (about 33 percent). The company operates in two reporting segments, Domestic (all U.S.based operations in all segments) and International.

The various retailers have up to six different revenue categories each, with U.S. Best Buy and the Canadian Future Shop stores offering the broadest selection of merchandise. Other stores offer a subset of the six categories, which include consumer electronics, home office, entertainment software, appliances, services, and other. The services revenue category consists primarily of service contracts, extended warranties, computer-related services, product repair, and delivery and installation for home theater, mobile audio, and appliances.

The company has a conscious strategy to create a successful total experience for its customers, with advice and a.s.sistance both for product purchase and for installation and support after the sale. The prominently branded "Geek Squad" in-store and mobile services are at the center of this effort. We like the company's mantra: "We make technology deliver on its promises."

Financial Highlights, Fiscal Year 2011 (ended February 2011).

After ringing sales, same-store sales, and gross margin gains through most of FY2011, the company reported a sharp and somewhat surprising slowdown at the end of calendar year 2010 just as the holiday shopping season got into full swing. Although the company met its profits targets in part due to share buybacks, same-store sales fell some 5 percent from a year earlier (an admittedly tough comparison because the Windows 7 rollout happening during the earlier period). Driven in part by decreasing prices and increased ease of buying flat screen televisions, the company cited loss of market share to discount retailer Wal-Mart and to Amazon.com. The company lowered its FY2011 guidance approximately 10 percent.

The company continues to be a prodigious generator of cash flow, especially for a relatively low margin retail business. Value Line projects cash flow of $6.65 per share in FY2011, a healthy sum for shares selling mainly in the 30s and 40s, and with capital needs for store expansion slowing. With the exception of a flat 2008, cash flow per share has increased steadily and substantially each year.

Reasons to Buy.

Best Buy, more than most technology retailers, seems to have grasped the notion that they can increase the size of most tickets if the salesperson applies some expertise to what the customer is saying, and what customers really need beyond the product itself. The company wants to sell the connectedness of its products, and it seems that they are providing their salespeople with the proper tools and training to do so. The "Geek Squad" offering further supports this notion with an aptly branded configuration and tech support service. More than other retailers, Best Buy sells solutions, and customers have responded well while the company has expanded its margins as a result. We like this approach.

The company enjoyed a natural and fairly effortless gain in market share with the 2009 demise of Circuit City. Now the forces of Wal-Mart, Target, Amazon, and others give the company a challenge to hold onto that market share. We feel that these stores primarily compete in the low-end part of the market, where solutions and service are less important. These forces may drive Best Buy toward more upscale customers and vice versa, which might be a favorable outcome. The focus on solutions, plus continued expansion overseas, should help BBY weather the storm. The stock price "markdown" at the end of 2010 to the low to mid 30s, with a dividend approaching 2 percent, may have made the shares a true Best Buy. We think the company has the brand, the positioning, and the management talent to deal with, and capitalize on, the challenge.

Reasons for Caution.

Those who can't stomach some uncertainty as the company strives to adapt to change and make solutions a bigger component of the business might want to steer clear. Additionally, the recent trend for shoppers with smartphones and "comparison apps" to comparison shop and order right from the store floor may be troubling short term, but smart retailers will learn to use this new connectivity to pitch their own specials. We expect Best Buy to figure this one out and lead the pack, and to "dive in headlong" as Chief Marketing Officer Barry Judge was recently quoted as saying.

CONSERVATIVE GROWTH.

Campbell Soup Company.

Ticker symbol: CPB (NYSE) S&P rating: A Value Line financial strength rating: B++ Current yield: 3.4%.

Company Profile.

Campbell Soup Company is the world's largest soup maker. They also produce many other foods and beverages, but at least as far as we know, Andy Warhol never painted a jar of the company's Pace Pineapple Mango Chipotle Salsa, so the company is still best known for its ubiquitous soups. While there are twenty such brands under the Campbell roof, the original Campbell soup is still far and away the most important. The three top soups make up three of the top ten grocery products sold in the United States every week. Approximately 80 percent of U.S. households purchase the soup, and the average inventory on hand is six cans. Few brands have enjoyed such penetration and loyalty.

The company has four reporting segments: U.S. Soup, Sauces and Beverages; Baking and Snacking; International Soup, Sauces and Beverages; and North America Foodservice. Within each segment are the many familiar brands that const.i.tute the business: Swanson, Prego, Pace, V8, Pepperidge Farm, Arnott's, Wolfgang Puck, and, of course, Campbell's.