The 100 Best Stocks You Can Buy 2012 Part 21

CONSERVATIVE GROWTH.

International Paper Company.

Ticker symbol: IP (NYSE) S&P rating: BBB Value Line financial strength rating: B+ Current yield: 2.6%.

Company Profile.

International Paper Company (International Paper), incorporated in 1941, is a global paper and packaging company complemented by a North American merchant distribution system with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia, and North Africa.

At the end of 2009, the company operated twenty-one pulp, paper, and packaging mills; 146 converting and packaging plants; nineteen recycling plants; and three bag facilities. Production facilities in Europe, Asia, Latin America, and South America included nine pulp, paper, and packaging mills; fifty-two converting and packaging plants; and two recycling plants.

The company operates in six segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution, Forest Products, and Specialty Businesses and Other. The Printing Papers segment produces uncoated printing and writing papers, including papers for use in copiers, desktop and laser printers, and digital imaging. Market pulp is used in the manufacture of printing, writing, and specialty papers, towel and tissue products and filtration products. Pulp is also converted into non-paper products such as diapers and sanitary napkins.

The Industrial Packaging segment produces containerboard, including linerboard, whitetop, recycled linerboard, and saturating crafto. About 70 percent of the company's production is converted into corrugated boxes and other packaging. The company also recycles a million tons of corrugated, mixed, and white paper through twenty-one recycling plants.

The Consumer Packaging segment produces somewhat finer materials including bleached sulfate board for making packaging applications like food, cosmetics, pharmaceuticals, etc. Subsidiaries such as Sh.o.r.ewood Packaging Corporation form containers and add graphics for specific customers.

Xpedx, the company's North American merchant distribution business, provides distribution services and products to a number of customer markets. Xpedx supplies commercial printers with printing papers and graphic pre-press, presses, and post-press equipment, building services and away-from-home markets with facility supplies, and manufacturers with packaging supplies and equipment.

The company suffered a major swing in fortunes in 2008 as demand softened and costs escalated. Earnings dropped 55 percent, the dividend was cut 70 percent, and the stock price reached a nadir just under $4 per share. The company acquired the containerboard, packaging, and recycling businesses of Weyerhaeuser that year, and set out to continue a restructuring into 2009 and 2010, including the divest.i.ture of most of its 200,000 acres of U.S. forestland and an international growth initiative spearheaded by the acquisition of SCA Packaging Asia in 2010. The company is becoming more aggressive in achieving scale, becoming more focused, and modernizing its product mix.

Financial Highlights, Fiscal Year 2010.

Aided by strengthening customer demand, a better product mix, and better-than-expected results from the Weyerhaeuser acquisition, the FY2010 transition was mostly a success. Revenue at the end of 2010 was running 7 percent ahead of comparable periods in 2009; Q4 earnings were almost triple the year-ago period. Capping it off, the company announced a 50 percent dividend increase to $.1875 per share per quarter, exceeding what a.n.a.lysts had hoped for and bringing the company halfway back to the $1.00 per share paid for years up until the 2008 down cycle.

Reasons to Buy.

Based on the sharp drop in 200809, it was an exercise in patience to keep this company on the 100 Best Stocks list. It turned out to be the best performer on our 2010 list, but one must consider where it started. That said, the company has done a good job of turning itself around, and, like some patients finally undergoing long-awaited surgery, we think it is emerging stronger and better for the experience. The company has added to its dominance in key commodity and value-add paper and packaging markets, exited low-margin businesses, and has increased operating margins substantially as a result. We think the company is well managed and is a solid player in a fairly steady industry. A return of the dividend to the $1.00 level would provide a decent income for shareholders as well.

Reasons for Caution.

For the most part, IP is in a commodity business with a high reliance on corrugated boards and raw packaging materials. To the extent that the company can find ways to add value to its products and deliver finished paper and packaging to end consumers, and develop international markets, the company will overcome the negatives of being a commodity producer. We're also concerned that IP's customers, in efforts to cut costs and be more environmentally sensitive, might cut or trim packaging consumption. We also believe that enhanced Internet experiences and devices like iPads may be reducing the amount of computer-generated printing. More aggressive investors will definitely not find this to be a s.e.xy business.

AGGRESSIVE GROWTH.

Iron Mountain Incorporated.

Ticker symbol: IRM (NYSE) S&P rating: BB- Value Line financial strength rating: B Current yield: 2.9%.

Company Profile.

The name implies security and invulnerability, and as such, Iron Mountain is the world's leading provider of secure record, doc.u.ment, and information-management services. Businesses that require or desire off-site, secure storage and/or archiving of data in physical or electronic form contract with IRM for whatever level of service meets their needs.

In general, IRM provides three major types of service: records management, data protection and recovery, and information destruction. All three services include both physical and electronic media.

Revenues accrue to the company through two streamsstorage and services. Storage revenues consist of recurring per-unit charges related to the storage of material or data. The storage periods are typically many years, and the revenues from this service account for just over half of IRM's total revenue over the past five years. Service revenue comes from charges for any number of services, including those related to the core storage service and others such as temporary access, courier operations, secure destruction, data recovery, media conversion, and the like.

Although its roots are in doc.u.ment management, the company recently expanded its operations in the area of digital records management. Digital archiving and services are a.n.a.logous to the services done for paper, except that they are done for e-mail, e-statements, images, and other forms of electronic doc.u.ments. It also includes web-based archiving of computer, server, and website data, as well as storage of backup or disaster recovery digital media. The company also offers tailored industry-specific services for industries like health care. The company also offers value-add services in organizing, indexing, and facilitating search through doc.u.ments and records.

IRM's client base is deep and diverse. They have over 90,000 clients, including 93 percent of the Fortune 1000 and over 90 percent of the FTSE 100. They have over 900 facilities in 165 markets worldwide, and they are six times the size of their nearest compet.i.tor.

Financial Highlights, Fiscal Year 2010.

Iron Mountain has had a couple of soft years. First, there was the normal 200809 downturn that affected everybody. Less business means less paper and fewer records; that, combined with increasing cost containment on the part of many clients, led to a slight revenue and profit dip in 2009, nothing to be too worried about. Then the announcement of a $255 million write-down of the digital records storage venture ($1.24 per share) hit in September 2009 and IRMs shares were found on the new fifty-two-week lows list at a time when few other companies were there in sympathy. On top of that, Warren Buffett's Berkshire Hathaway sold its entire 8 million-share holding.

That turned out to be a pretty good entry point, for the company has rebounded smartly with $1.13 per share 2010 earnings on $3.14 billion in sales and operating margins at a new high of 30 percent. As evidence of the company's confidence in the future and in cash generation potential, it began paying dividends in early 2010, and raised that dividend 200 percent to an indicated $.75 per share per year during the fourth quarter.

Reasons to Buy.

Iron Mountain's business strategy for the past fifteen years has been one of becoming by far the biggest in the business with the strongest and most recognizable brand. Much of this growth and dominance has been achieved through acquisition and integration, buying smaller businesses and consolidating their operations and, more importantly, their customer base. Customers in this business tend to stay with a known quant.i.ty, and over the years, no one has become more known than IRM. This strategy has worked very well for them, and now IRM is the clear market leader. Their large, predictable revenue stream gives them the flexibility to maintain their policy of strategic acquisition while funding the resulting restructuring internally.

A common observation of IRM's critics is that paper records are dying off and most data is now generated and stored electronically, creating opportunity for compet.i.tors like IBM and EMC. This is true, but it ignores a couple of facts: Existing paper still needs to be stored for a long time, and there's a lot of it. Nearly 75 percent of IRM's revenue comes from paper storage, but this percentage is declining as IRM's customers are storing far more electronic data now.

It also ignores a number of other important points. For one, IRM's current customers would need a very good reason to split their data storage business between two vendors, one doing only electronic storage and the other doing electronic storage plus everything else as well. Second, if compet.i.tors for the electronic storage business become a problem, IRM can price their electronic storage below market and still be quite profitable. And last, for the customer base that IRM serves, this is not a burdensome expense. Changing vendors could likely cost them more than they might ever hope to save. For now, IRM has a pretty good moat.

Finally, it's hard to ignore the new and recently initiated dividend; the payout of nearly 3 percent is quite attractive for a company with a solid future and decent growth prospects.

Reasons for Caution.

Although many of its services are required for compliance to various record-keeping laws and norms, IRM is vulnerable to economic dips. Further, the company still hasn't completely found its way in the digital s.p.a.ce, which should prove to be its biggest growth area moving forward. It remains to be seen whether digital storage and services are as profitable as their paper counterparts.

GROWTH AND INCOME.

Johnson & Johnson.

Ticker symbol: JNJ (NYSE) S&P rating: AAA Value Line financial strength rating: A++ Current yield: 3.6 percent.

Company Profile.

Johnson & Johnson is the largest and most comprehensive health care company in the world, with 2010 sales of approximately $62 billion. JNJ offers a broad line of consumer products and over-the-counter drugs, as well as various other medical devices and diagnostic equipment.

The company has three reporting segments: Consumer Health Care, Medical Devices and Diagnostics, and Pharmaceuticals. In those segments, Johnson & Johnson has more than 200 operating companies in fifty-four countries, selling some 50,000 products in more than 175 countries. Among Johnson & Johnson's premier a.s.sets are its well-entrenched brand names, which are widely known in the United States as well as abroad. And as a marketer, JNJ's reputation for quality has enabled it to build strong ties to commercial health care providers.

The company has a stake in a wide variety of health segments: anti-infectives, biotechnology, cardiology and circulatory diseases, diagnostics, gastrointestinals, minimally invasive therapies, nutraceuticals, orthopedics, pain management, skin care, vision care, women's health, and wound care.

The company's vast portfolio of well-known trade names includes Band-Aid adhesive bandages; Tylenol; Stayfree, Carefree, and Sure & Natural feminine hygiene products; Mylanta; Pepcid AC; Neutrogena; Johnson's baby powder, shampoo, and oil; Listerine; and Reach toothbrushes.

The company has recently expanded acquisitions in key health care categories. In September 2009, JNJ, through a new subsidiary JANSSEN Alzheimer Immunotherapy, acquired most all of the a.s.sets and rights of Elan, plc related to its Alzheimer's Immunotherapy Program. In September 2010, JNJ acquired Micrus Endovascular, a global provider of minimally invasive devices for hemorrhagic and ischemic stroke.

Financial Highlights, Fiscal Year 2010.

Johnson & Johnson has a dominant and stable franchise in a secure and lucrative industry. We like the model of steady, recurring income from solid consumer brands such as Tylenol combined with more aggressive and lucrative ventures into pharmaceuticals and surgical products. Yet the company's earnings performance has been tepid of late, in part due to a series of expensive recalls, liability lawsuits, and plant shutdowns. As examples, the company had recalls of Tylenol, Benadryl, and Zyrtec during 2010, and in early 2011 a $420 million cla.s.s action suit was filed against subsidiary DuPuy Orthopedics for hip replacement devices.

Revenues slackened a bit during the recession from a $63.7 billion level in 2008 to $61.7 billion in 2009, and back to just over $62 billion in 2010. Earnings during that period remained almost flat, and rose slightly on a per share basis as the company repurchased about 100 million shares of its approximately 2.8 billion shares outstanding. Because of continued costs of these recalls and lawsuits, management guided earnings slightly lower for 2011 to $4.80$4.90 per share from previous estimates of $4.99$5.05 because of the "near term pressures on the business."

The company continued to expand its global footprint, building new research and manufacturing operations in Brazil, Russia, India, China, and other developing markets. International markets account for about 50 percent of sales.

The company also received a nice $1 billion b.u.mp from a legal settlement involving patent infringement on cardiac stents with Boston Scientific in January 2010, and another $700 million in January 2011 from the same settlement.

Reasons to Buy.

JNJ has made a lot of headlines recently for its stumbles in manufacturing and in certain consumer and professional markets, yet its core business remains solid and intact. Earnings and cash flow are steady, and when you combine the healthy dividend and share repurchases, shareholder returns have been healthy even during the slight period of "sickness" experienced by the company. Once the current "sniffles" are out of the system, the company will likely resume a steady growth rate in the 5 percent range. Acquisitions and a healthy new drug pipeline will likely add a bit to margins.

International sales continue to be a solid growth path. As standards of medical care rise internationally and as the potential for health care funding reform in the United States increases, J&J's growth outside the United States is particularly appealing. The world health care market is expected to grow 5 percent per year over the next five years, and J&J partic.i.p.ates in over 30 percent of those markets.

Despite the size, some softness in consumer spending, and the aforementioned problems, the company has delivered a solid double-digit growth triple play in ten-year earnings, cash flow, and dividend growth, despite sales growth narrowly missing double digits at 9.5 percent. We feel that JNJ is rock solid with modest growth prospects and little long-term downside.

Reasons for Caution.

While JNJ is a "steady Eddie" in a steady health care segment, investors aren't likely to strike it rich on this company due to its size and relative steadiness of the markets it serves. Even a blockbuster drug or acquisition isn't likely to move the needle very much.

There may be some concern that regulators and litigators, now having seen JNJ as a juicy target for action, will step up these actions, or short of that, watch JNJ through a microscope creating a distraction for management. Worse, these events could damage consumer perception and brand strength if they continue. However, we think these blemishes will likely heal and won't be contagious to long-term performance.

CONSERVATIVE GROWTH.