The 100 Best Stocks You Can Buy 2012 Part 16

Reasons for Caution.

For many, nuclear power is a reason for caution, and we certainly would want to diversify utility holdings to avoid overexposure to utilities with nuclear facilities. Like most utilities, Duke depends on regulatory rate relief to grow revenues, and so the regulatory environment is critical. The Progress acquisition would create size and critical ma.s.s but may also consume a lot of cash and make the company too big and perhaps too reliant on acquisitions to fuel growth. That said, the company seems well enough managed to take on such an endeavor.

GROWTH AND INCOME.

E. I. DuPont De Nemours.

Ticker symbol: DD (NYSE) S&P rating: A Value Line financial strength rating: A++ Current yield: 5.3%.

Company Profile.

"The miracles of science" is the slogan and rallying cry of this $30 billionplus science and technology juggernaut originally founded in 1802 to make gunpowder. Although the company is known to many as a cyclical "diversified chemical" company making a host of rather lifeless chemical products and ingredients, many by the tank car load, today's DuPont is reawakening as a world leader in science and technology with important end product ingredients in a range of disciplines, including biotechnology, electronics materials and science, safety and security, and synthetic fibers. The company has taken on a newly found pride, referring to their business as "market-driven science," reflected in 2009's introduction of over 1,400 new products and more than 2,000 patent grants. The company has always been a technology leader with such well-known inventions as Nylon and Rayon in earlier years, and Teflon and Kevlar more recently, but at least until recently has been taken in more as a commodity producer than an innovator. We see signs of change in that reputation.

In 2009, the company strategically realigned its businesses into several market- and technology-focused growth platforms. Included are: Agriculture and Nutritiona rapidly growing segment seen to approach 2830 percent of sales with brands like Pioneer seeds and a host of insect protection and other systems. The Pioneer acquisition happened twelve years ago; most don't observe DuPont as an ag company either. But the 2011 acquisition announcement for Denmark's Danisco for $6.3 billion, a major producer of food ingredients, additives, and enzymes, signals rapid growth for the ag business, now projected at 35 percent of sales going forward.

Safety and Protection makes protective fibers and clothing, including bulletproof apparel and disinfectants.

Health Care & Medical specializes in protection apparel, disinfectants, and protective building surfaces.

Electronic and Communications makes a line of high-tech materials for the semiconductor industry, including ceramic packages and LCD materials.

Building Materials sells such ubiquitous brands as Tyvek housewrap and Corian countertops.

And the core businesses:.

Performance Chemicals.

Performance Materials.

Performance Coatings.

The company has operations in ninety countries worldwide and about 60 percent of consolidated net sales are made to customers outside the United States. Worldwide subsidiaries and affiliates of DuPont conduct manufacturing, seed production, or selling activities, and some are distributors of products manufactured by the company.

DuPont has one of the largest R&D budgets of any company in the world and operates more than seventy-five R&D centers worldwide. DuPont's core research is concentrated at its Wilmington, Delaware, facilities. DuPont's modern research is focused on renewable bio-based materials, advanced biofuels, energy-efficient technologies, enhanced safety products, and alternative energy technologies.

Financial Highlights, Fiscal Year 2010.

A few years ago, the company projected 2012 earnings at $3.50 per share, up from the mid-$1 range. At the time, at least one pundit suggested that top management should take a drug test. But the truth of the matter? The company appears on track to meet the goal a year early. Core businesses are rebounding with the rebound in the auto industry and others, and the newer businesses and products are growing and making a steadily larger contribution. One a.n.a.lyst now estimates some half of 2012 business will come from "growth" businesses and products.

Further, the CEO now projects annual revenue growth of 7 percent and earnings growth of 12 percent during the 20102015 timeframe.

Reasons to Buy.

DuPont seems to be succeeding in its efforts to reinvent itself as an innovation leader, and to capitalize equally on innovation and product leadership in established categories. Not that this company doesn't have experience with innovationquite the opposite, in factthe problem seems to be in getting recognized for its innovation. The product pipeline continues to be full, individual product margins remain strong, and the company's biggest moneymakers still dominate their markets.

The company now visualizes itself as a "fast growing science company" set to capitalize on "global megatrends"population growth, alternative energy production, and so forth. The improvement of worldwide food production is at the center of its new growth initiatives. Alternative energy will also get the spotlight: The Danisco acquisition is, among other things, a major play in the synthetic cellulosic biofuels market with its Genencor industrial enzymes business. The U.S. government has mandated some 30 billion gallons of annual cellulosic biofuel production by 2017.

In short, this company is firing on all cylinders, especially in terms of capitalizing on existing brands and technology leadership. The 3.3 percent dividend yield provides an added measure of safety and opportunity to wait for things to really come together.

Reasons for Caution.

For whatever reasonanemic marketing may be one of themthe company has seldom been able to capitalize on its "science and technology" positioning, and is viewed as a commodity producer instead. We'll see if it's any different this time. The stock price has woken up to these brighter prospects, and has been relatively strong, particularly in comparison to its 2009 low of $16. Buyers should look for dips.

CONSERVATIVE GROWTH.

Ecolab, Inc.

Ticker symbol: ECL (NYSE) S&P rating: A Value Line financial strength rating: A Current yield: 1.5%.

Company Profile.

Ecolab is the global leader in commercial products and services used for cleaning, sanitizing, food safety, and infection prevention. Founded in 1923 and headquartered in St. Paul, Minnesota, Ecolab serves customers in more than 160 countries across North America, Europe, Asia and the Pacific, Latin America, the Middle East, and Africa, and employs more than 26,000. The company delivers comprehensive programs and services to industries such as foodservice, food and beverage processing, hospitality, health care, government and education, retail, vehicle care, pest elimination, and facilities maintenance.

The company conducts its domestic business under these segments: Inst.i.tutional Division is the leading provider of cleaners and sanitizers for utensils, laundry, kitchen cleaning and general housecleaning, product-dispensing equipment and dishwashing racks and related kitchen sundries to the foodservice, lodging, and health care industries. It also provides products and services for pool and spa treatment.

Food & Beverage Division offers cleaning and sanitizing products and services to farms, dairy plants, food and beverage processors, and pharmaceutical plants.

Kay Division is the largest supplier of cleaning and sanitizing products for the quick-service restaurant, convenience store, and food retail markets.

Ecolab also sells janitorial and health care products; textile care products for large inst.i.tutional and commercial laundries; vehicle care products for rental, fleet, and retail car washes; and water-treatment products for commercial, inst.i.tutional, and industrial markets. Other domestic services include inst.i.tutional and commercial pest elimination and prevention, and commercial kitchen equipment repair services.

The company operates directly in nearly seventy countries, with about 47 percent of sales originating abroad. In addition, the company reaches customers in more than 100 countries through distributors, licensees, and export operations, with more than fifty state-of-the-art manufacturing and distribution facilities worldwide.

Financial Highlights, Fiscal Year 2010.

FY2009 was a rough period for the restaurant and hospitality industries, which are two of Ecolab's core markets. During that year, the company didn't fare too badly, taking about a $200 million, or 4 percent, hit to the top line, which has since recovered. Improved operating efficiencies actually resulted in an earnings gain for the year. In FY2010, the recovery in the restaurant and hospitality industries lagged the rest of the economy (these businesses are doing a lot of cost cutting, too), and earnings came in at $2.23 per share, a nice 11 percent gain despite revenues flat from two years ago. The company prides itself on efficiency, noting that it has achieved double-digit earnings gains for nine of the past ten years despite relatively modest revenue increases.

For FY2011, the company expects earnings in the $2.48 to $2.53 range, keeping the double-digit tradition alive. Strong sales in Asia Pacific and Latin America and an accelerated restructuring in Europe will offset continued sluggish results in the U.S. cleaning and sanitizing businesses. An accelerated recovery in the restaurant, hospitality, and textile sectors would help considerably. The company is focused on total shareholder return, retiring about 8 percent of outstanding shares since 2004 and raising the dividendalbeit modestlyfor nineteen consecutive years.

Reasons to Buy.

Ecolab is the largest partic.i.p.ant (with a 10 percent share) in what is estimated to be a $45 billion global cleaning and sanitation market, and Ecolab's operating margin is three times that of its largest compet.i.tor, DiversyJohnson. Overall, the market is not especially cyclical and has a built-in growth component as governments improve and modify regulations regarding cleanliness for public and private inst.i.tutions and commercial buildingsthe 4 percent revenue swing in 20082010 bears that out.

The company is not simply a distributor, as many other smaller players tend to be;they have over 4,500 patents on their branded products. Many of their products are cleaning systems, which once in place, tend to stay in place and then require Ecolab-branded consumables throughout their life.

In light of several well-publicized food contamination incidents over the past two years, Ecolab's customers have a renewed focus on cleanliness and sanitation in food preparation and serving, which is the heart of Ecolab's Inst.i.tutional business. Ecolab is leveraging this positive attention by growing their presence in mainland China, where they have found a receptive customer base and huge opportunity. The company is simply the largest and most efficient player in a large and essential market niche, and that niche is expanding, particularly overseas.

Reasons for Caution.

The stock has recently been trading at multiples in the mid-twenties while the stock has been flirting with all-time highs. That's okay if there's support for those valuations, but it isn't clear that growth opportunities support such valuations, particularly if the company runs out of efficiency measures to deploy. Companies under the gun to grow when the core business has matured tend to expand through acquisitions, and such behavior has its risks.

GROWTH AND INCOME.

ExxonMobil Corporation.

Ticker symbol: XOM (NYSE) S&P rating: AAA Value Line financial strength rating: A++ Current yield: 2.3%.

Company Profile.

ExxonMobil is the world's largest publicly traded oil company. They are engaged in the exploration, production, manufacture, transportation, and sale of crude oil, natural gas, and petroleum products. They also have a stake in the manufacture of petrochemicals, packaging films, and specialty chemicals.

Divisions and affiliated companies of ExxonMobil operate or market products in the United States and some 200 other countries and territories. Their princ.i.p.al business is energy, involving exploration for, and production of crude oil and natural gas; manufacture of petroleum products; and transportation and sale of crude oil, natural gas, and petroleum products.

The company is a major manufacturer and marketer of basic petrochemicals, including olefins, aromatics, polyethylene, and polypropylene plastics and a wide variety of specialty products. It also has interests in electric power generation facilities.

ExxonMobil conducts oil and gas exploration, development, and production in every major accessible producing region in the world. They have the largest energy resource base of any non-government company and are the largest non-government natural gas marketer and reserves holder. They're the world's largest fuels refiner and manufacturer of base stocks used for making motor oils. They have refining operations in twenty-six countries, 42,000 retail service stations in more than 100 countries, and lubricants marketing in almost 200 countries and territories. They market petrochemical products in more than 150 countries, and 90 percent of the company's petrochemical a.s.sets are in businesses that are ranked number one or number two in market position.

The XTO acquisition, completed in 2010, is a strong indication of Exxon's shift toward more profitable upstream operations, as well as a play in the likely future upside in natural gas prices. Since then, the company has been relatively quiet on the acquisition front, but we may see more activity, especially in the natural gas business.

Financial Highlights, Fiscal Year 2010.

Not too surprisingly, Exxon is rebounding well from the economic and energy price lows of 2009. FY2010 sales came in at $342 billion, well ahead of 2009's $275 billion but short of the energy heyday high of $425 billion in 2008. Earnings came in at $6.22/share, compared to $3.98 for the full year 2009 and a stellar $8.69 for 2008. It's interesting to observe the impact of the price of a few commodities on a company's business. Most predict earnings and margins will stabilize closer to numbers seen in 200506. The company appears headed toward a more balanced mix of revenue and profitability in oil and gas, exploration, production, distribution, and chemical manufacturing segments.

Reasons to Buy.

ExxonMobil and Apple Inc. vie for the number one and number two spots in total market capitalization, that is, the total value of shares outstanding. A decision to buy ExxonMobil over a company like Apple is essentially the decision to own a company with 23 billion barrels of oil equivalent in the ground and the means to bring them to market as high value add products, in contrast to owning a company with outstanding products, market acceptance, and innovation. It's an interesting choice.

Exxon is a huge generator of cash, and they've used considerable amounts of that cash to buy back shares. Outstanding shares dropped from 6.1 billion in 2005 to an estimated 4.8 billion at the end of 2011. This is a significant move and long-term benefit for shareholders.

Finally, Exxon is the largest publicly traded oil company in the world, and in the oil business, there are strategic advantages that accrue to size. Having the resources to bring to bear on an opportunity can mean the difference between winning and losing an exploration or development award. Despite the company's enormous size, it has managed to return double-digit growth over the past ten years in sales, earnings, and cash flow, although these might be tied more to energy prices than operational excellence.