The 100 Best Stocks You Can Buy 2012 Part 11

Campbell's products are distributed to 120 countries worldwide and are sold through its own sales force and through distributors. U.S.based operations accounted for 81 percent of revenue and 88 percent of earnings through FY2010. Products are manufactured in twenty princ.i.p.al facilities within the United States and in fourteen facilities outside the country, primarily in Australia, Europe, and Asia/Pacific. The vast majority of these facilities are company-owned.

Campbell's product strategy centers on three large, global categoriessimple meals, baked snacks, and healthy beverageswhich they feel are well aligned with broad consumer trends. The company's growth strategy has evolved toward greater innovation in product marketing and brand recognition and new packaging designed to broaden use in today's fast-paced economy, as well as a healthy dose of internationalization. New store displays and branding offer soups in four easily recognized categories: Cla.s.sic Favorites, Healthy & Delicious, Taste Sensations, and Healthy Kids. We feel these categories move the brand forward without departing from core values. New microwaveable and heat-and-serve packages expand use into on-the-go environments. Finally, the core brand promise "Nourishing Peoples' Lives Every Day" should play well in the international s.p.a.ce, a frontier the company is just beginning to capitalize on.

Financial Highlights, Fiscal Year 2009.

Campbell has not been by any means a "growth star" for the last ten years, with compound annual sales, earnings, and cash flow all growing at around 1 percent. Recent performance has continued this trend, but cost cutting and the moderate innovations and international expansion should help move the company forward. The company is exposed, however, to commodity price increases.

Reasons to Buy.

Brand strength is a key reason to stock a few shares of Campbell in your investment pantry. Campbell owns the number one or number two position in each of the product categories in which it partic.i.p.ates. It dominates the $4 billion U.S. soup market with a 60-plus percent market share.

The company is investing heavily in Russia and China, which together account for half of the world's soup consumption. Russia and China have essentially no premade soups, so there is no in-place compet.i.tion. Campbell's four largest current markets for premade soups (United States, Canada, France, and Germany) account for only 6 percent of the world's soup consumption, so opening up the Russia and China markets would create a tremendous growth opportunity. Just a 4 percent share of those markets would const.i.tute a unit volume increase of over 10 percent. The company has invested $50 million per year for the past several years and has begun selling concentrated broths in both markets. Campbell expects to be profitable there within three years.

This is a fairly defensive stock with one of the lowest beta coefficients on our list at 0.28; non-cyclical, non-financial, low debt, and with a respectable yield. It's a good place to be if you're building a core of safe, well-established businesses that grow conservatively and occupy the top positions in their markets.

Reasons for Caution.

It will be difficult for Campbell to organically grow market share for soups in the United States. The market is saturated and Campbell's customer base is an aging demographic that is not quick to adopt the new brands that Campbell will need to introduce to invigorate the portfolio. As others, like Coca-Cola, have found out over the years, there are risks inherent with tinkering with a long-established brand such as Campbell's.

Aggressive Growth.

CarMax, Inc.

Ticker symbol: KMX (NYSE) S&P rating: NA Value Line financial strength rating: B+ Current yield: Nil.

Company Profile.

"The Way Car Buying Should Be." That's the slogan used by this clean-cut chain of used vehicle stores and superstores and its new big-box retail-like model for selling cars. CarMax buys, reconditions, and sells cars and light trucks at 103 retail centers in forty-nine metropolitan markets, mainly in the Southeast and Midwest. The company specializes in selling cars that are under six years old with less than 60,000 miles; the cars are sold below Blue Book value in a no-haggle environment. The price is the price; the emphasis is on the condition of the vehicles and on a helpful and friendly sales and transaction process. Sales representatives are compensated for cars they sell, but not in such a way that it drives them to push the wrong car on a customer. The company sold some 357,129 used vehicles in FY2010 (which ended in February 2010) and most reports suggest they are gaining market share in the markets they serve with a high degree of customer satisfaction. Further, the health of the economy and consumer spending have swung car buying into a higher gearbut with newfound consumer prudence, many of these purchases are heading to the one-to-six year old used car sector of the business. In addition to "retail" used car sales, CarMax is a big player in auto wholesaling, having moved almost 200,000 units, mostly taken in trade last year.

CarMax also has service operations and web-based and other tools designed to make the car selection, buying, and ownership experience easier. The offering continues to be unique in the industry, and compet.i.tors would have a long way to go to catch up.

During the depth of the downturn, the company put its expansion plans on hold, but has opened five new stores recently and plans to resume store openings into the future. There is considerable geography in the United States not yet served by CarMax, including the Pacific Northwest, Colorado, and most of the Northeast.

Financial Highlights, Fiscal Year 2011 (FY2011 ends February 28).

CarMax ended their fiscal year 2011 in February 2011, so most of the results actually cover the calendar year 2010.

FY2010 saw a strong recovery for KMX. After being battered against the rocks for all of a dismal 2008, financial health was restored due to a number of factors. An improved credit market and pent-up demand drove sales through the entire year. The government's "cash for clunkers" program was a G.o.dsend for dealers, helping push new car sales and boosting consumer confidence. The sustained low interest rates with improved credit availability boosted financing profits. Tightened internal controls at CarMax reduced SG&A by $100 million on an annualized basis.

The result of the above is that CarMax's sales rebounded to 2006 levels and operating margin nearly tripled. Earnings increased four-fold to $255 million and net margin reached a record high of 3.4 percent. Share price went along for the ride, increasing over 200 percent, making CarMax one of our top performers from last year's portfolio.

Reasons to Buy.

Quite simply, CarMax continues to be a stock to buy if you believe the traditional dealer model is broken, and if you believe people will continue to see value in late model used vehicles.

Additionally, CarMax brings the latest in business intelligence and a.n.a.lytic models to the car marketing process, in procurement, merchandising, pricing, and selling the vehicles. Do green Jeep Commanders sell well in Southern California? Then let's find some, and put them on the lot there, and set a market-based price. KMX is well ahead of the industry in making a.n.a.lysis-based supply and selling decisions.

In addition, a bigger picture and a.n.a.lytic tools allow CarMax to adjust inventories to business conditions more quickly; in the recent downturn, such inventory was reduced by tens of thousands of vehicles. That inventory is on the rise once again, prompting some a.n.a.lysts to raise eyebrows in late 2010, but the reality is that the company wouldn't have made this move if the business didn't warrant it. Similarly, the company has resumed hiring store help, another indicator of a solid future.

CarMax is clearly taking market share from "trad" used car dealers. There are close to 70,000 new and used car dealerships in the United States; that number will shrink over the next few years while CarMax builds brand strength and reputation in this important market and gains operational strength and experience to support it. The company is positioned well both for organic growth through market share and for geographic growth; additionally, earnings growth will be aided by increased market dominance, which should help both pricing and per-vehicle cost. CarMax is already the largest used car buyer in the world.

Reasons for Caution.

CarMax will always be somewhat vulnerable to economic cycles, the availability of credit, and of quality used vehicles to resell. Used car supply has been a concern, especially with the downturn in new car sales and the scaling back in vehicle leasing seen in recent years. In addition, while international markets are a golden opportunity for most of our 100 Best Stocks, it isn't clear how this company can grow internationally, although it is far from out of the question.

AGGRESSIVE GROWTH.

Caterpillar, Inc.

Ticker symbol: CAT (NYSE) S&P rating: A Value Line financial strength rating: A Current yield: 1.9%.

Company Profile.

Headquartered in Peoria, Illinois, Caterpillar is the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. It is a Fortune 50 industrial company with more than $40 billion in sales in a reasonably healthy economy. There are some 3 million of Caterpillar's distinctive yellow "Cat" branded machines in service in 180 countries around the world. International sales account for some 67 percent of the company's revenues.

Caterpillar's broad product line ranges from the company's line of compact construction equipment to hydraulic excavators, backhoe loaders, track-type tractors, forest products, off-highway trucks, agricultural tractors, diesel and natural gas engines, and industrial gas turbines. Cat products are used in the construction, road building, mining, forestry, energy, transportation, and material-handling industries.

Caterpillar products are sold, rented, and serviced through a notably loyal and effective dealer network. Products and components are manufactured in forty-one plants in the United States and forty-three more plants worldwide. The company has three operating segments: Machinery, Engines, and Financial Products.

Caterpillar's largest segment, the Machinery unit, makes the company's well-known earthmoving equipment. Machinery's end-markets include heavy construction, general construction, and mining quarry and aggregate, industrial, waste, forestry, and agriculture. End markets are very cyclical and compet.i.tive. Demand for Caterpillar's earthmoving equipment is driven by the health of global economies, commodity prices, and interest rates.

For decades, the Engine segment made diesel engines solely for the company's own earthmoving equipment. Now, Engine derives about 90 percent of sales from third-party customers, such as Paccar, Inc., the maker of well-known Kenworth and Peterbilt brand tractor/trailer trucks. Engine's major end markets are electric power generation, on-highway truck, oil and gas, industrial/OEM, and marine.

The Financial Products segment, which provides 7.6 percent of revenues but 20 percent of operating profits, primarily provides financing to Caterpillar dealers and customers. Financing plans include operating and finance leases, installment sales contracts, working capital loans, and wholesale financing plans.

Financial Highlights, Fiscal Year 2010.

Towards the middle of the year, the company really started to regain traction after a very soft 2009, which saw a stunning cyclical decline of 37 percent of sales and 75 percent in earnings.

The downturn was the worst for the company since the 1940s. In response to the downturn, the company went into cost-control mode, while at the same time, doing what it could to prop up the dealer network, including allowing dealers to cancel orders for the first time. One cost-control measure was the expansion of overseas manufacturing in Brazil, India, and China. These moves, as with many companies during the recession and recovery, but more so with Caterpillar, led to greater strength when the recovery finally took hold. At the end of 2010, earnings, and the stock price, were quite healthy; CAT was one of the best-performing stocks in the Dow Jones Industrial Average.

Reasons to Buy.

Caterpillar is the world's largest supplier of heavy equipment. The company continues to be a strong player in international business and exports, the expansion of mining and the rebuilding of U.S. infrastructure, and the building of new infrastructure, particularly in Latin America and Asia. The company enjoys a solid brand strength and reputation worldwide. Stated goals to increase earnings to $10 per share seem on track, a.s.suming the economy stays reasonably healthy. The strength and loyalty of the dealer network, coupled with the in-house financing business, are pluses. The company acquired rail locomotive maker Electro-Motive Diesel, formerly owned by GM, in 2010. This acquisition will produce $1.8 billion in new sales and makes Cat a dominant player in the lucrative rail market.

We like the combination of brand excellence, management excellence, and continued growth prospects in infrastructure creation and replacement. The company has been on a long and successful triple play, experiencing double-digit sales, earnings, and cash flow growth for the past ten years, which with the exception of 2009, accelerated sharply in the past five years. The company seems to be on the right track, a.s.suming healthy global economic fundamentals.

Reasons for Caution.

Caterpillar is irretrievably tied to the economic cycle, although as we've seen in the last recession, economic downturns can lead to greater spending on infrastructure, which can help Cat even during these lean times. While foreign markets are a strength, we are also concerned about foreign compet.i.tion from companies like Kubota and Komatsu, makers of mainly smaller, more compact equipment that is cheaper to acquire and operate. The share price has responded well to the recovery; new investors would be encouraged to wait and buy on dips. Because of the cyclical nature, dividend payout and increases have been relatively modest compared to gains in earnings and cash flow.

GROWTH AND INCOME.

Chevron Corporation.

Ticker symbol: CVX (NYSE) S&P rating: AA Value Line financial strength rating: A++ Current yield: 3.7%.

Company Profile.

Chevron is the world's fourth largest publicly traded, integrated energy company based on oil-equivalent reserves and production. It is engaged in every aspect of the oil and gas industry, including exploration and production, refining, marketing and transportation, chemicals manufacturing and sales, and power generation.

Active in more than 180 countries, Chevron, formerly ChevronTexaco from the 2001 merger, has reserves of 11.9 billion barrels of oil and gas equivalent and daily production of 2.7 million barrels. In addition, it has global refining capacity of more than 2 million barrels per day (bpd) and operates more than 22,000 retail outlets (including affiliates) around the world. The company also has interests in thirty power projects now operating or being developed.

Its downstream (refining/retailing) businesses include four refining and marketing units operating in North America, Europe, West Africa, Latin America, Asia, the Middle East, and southern Africa. Downstream also has five global businesses: aviation, lubricants, trading, shipping, and fuel and marine marketing.

The company's global refining network comprises twenty-three wholly owned and joint-venture facilities that process more than 2 million barrels of oil per day. Gasoline and diesel fuel are sold through more than 22,000 retail outlets under three well-known consumer brands: Chevron in North America; Texaco in Latin America, Europe, and West Africa; and Caltex in Asia, the Middle East, and southern Africa.

Chevron is the number one jet fuel marketer in the United States and third worldwide, marketing 550,000 barrels per day in eighty countries. The company's fuel and marine marketing business is a leading global supplier and marketer of fuels, lubricants, and coolants to the marine and power markets, with about 500,000 barrels of sales per day.

Financial Highlights, Fiscal Year 2010.

Chevron's sales in 2009 fell 36.8 percent to $167 billion, while net income fell 56.2 percent to $10.5 billion. Ouch. The overall decline in the worldwide economy drove down volumes significantly, leading to a large oversupply of both petroleum and gas products. As a result, benchmark prices for West Texas Intermediate crude fell 38 percent (full-year average) and natural gas prices experienced a similar decline, with prices falling 58 percent. If you're a vertically integrated oil company, those numbers pretty much tell you how your year is going to go.

As crude prices rose slowly through 2009, Chevron's refining operations were squeezed between higher input costs and reduced retail demand for gasoline. As a result, the downstream operations saw dramatically reduced earnings, falling from $3.5 billion in 2008 to $500 million in 2009.