The 100 Best Stocks You Can Buy 2012 Part 23

The company's key strategic focus to achieve top line and earnings growth includes driving organic growth and product innovation, new products, and new applications. The company will also focus on selective acquisitions in either specialty chemicals or industrial fluids, complementing Lubrizol's existing business lines.

Financial Highlights, Fiscal Year 2010.

For years, the company was an ordinary and rather uns.e.xy chemical concern until the mid-2000s; then a number of factors led to an impressive and accelerating top and bottom line growth that continues to this day. Ten-year compounded earnings growth is 5.5 percent, but for the past five years, it has been 12 percent, and Value Line estimates a 16.5 percent earnings growth range from 2008 through 2015. Lubrizol has established itself as a high-margin niche player supplying key ingredients to an a.s.sortment of industries, including transportation, manufacturing, consumer products, personal care, health care, and a number of others. Niche dominance is evidenced by operating margins, which have risen from the 1315 percent range in the mid-decade to an estimated 23.5 percent in 2010. The company has been able to raise prices and plans to do so in the near future.

The company raised its own guidance nearly every quarter in 2010, and finished the year with EPS of $9.91, some 31 percent ahead of 2009. That compares to earnings of $4.06 for 2007 and $2.50 for 2005. It's been quite a run, especially when you consider the recessionary interlude along the way.

Reasons to Buy.

Regardless of the effects of the Berkshire acquisition, Lubrizol has figured out how to unlock value in a relatively mundane industry, and future prospects are bright. The company has a lot of earning and cash generation power, and has begun to deploy that, not only for strategic acquisitions but also to buy back shares, of which there are only 65 million in the first place. The company recently authorized repurchase of up to 10 percent of its shares.

Reasons for Caution.

Additives are a moderate-growth segment, but are very profitable at the moment. This could change if oil prices spike up, but as long as material costs remain reasonable and Lubrizol is effectively hedged, the company's cost structure looks solid. In part due to earnings momentum, the shares have behaved recently like a momentum stock, with lots of new money piling in, and relatively small supply. This can change quickly with bad news, so LZ might be better suited for more aggressive investors or investors who have the time to pay close attention.

AGGRESSIVE GROWTH.

Marathon Oil Corporation.

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

Company Profile.

Marathon Oil is a vertically integrated producer, refiner, and marketer of petroleum and natural gas products. It sells crude to other refiners, but its primary revenue stream is through the sale of its refined petroleum products to resellers and to end consumers via company-owned retail locations.

Marathon had long operated in four segments: Exploration and Production; Oil Sands Mining; Refining, Marketing, and Transportation; and Integrated Gas. E&P is a worldwide producer and marketer of liquid hydrocarbons and natural gas. OSM mines, extracts, and transports bitumen from deposits in Alberta, Canada, and upgrades it to produce synthetic crude. RM&T refines, markets, and transports petroleum products throughout the Midwest and southeastern regions of the United States. Finally, IG transports liquefied natural gas and methanol worldwide.

In 2011, the company announced its intentions to spin off the RM&T refining and distribution business into a separate ent.i.ty, Marathon Petroleum Corporation. MPC would operate Marathon branded outlets as well as the Speedway chain of 1,300 service stations and convenience stores. The separated unit will also run the pipeline operations. The idea is to improve focus and "right size" the resulting companies; as of mid-2011 the plan hadn't been fully put into place. We continue to identify the current MRO as a 100 Best stock, and would continue to recommend the two derivative companies in the proposed proportions of 1 share of the current MRO E&P business plus 0.5 share MPC per share of MRO owned. Naturally, next year we will revisit the eligibility of both spinoffs for the 100 Best list.

The company has exploration rights/interests in the United States, Angola, Norway, Indonesia, Equatorial Guinea, Libya, Canada, and the United Kingdom. The bulk of their U.S. activities are in the Gulf Coast region. Overall, at the end of 2010, their reserves were distributed as follows: 40 percent in Africa, 35 percent in Canada, 18 percent in the United States, and 7 percent in Europe.

Marathon, via acquisition, holds a 20 percent outside-operated interest in the Athabasca Oil Sands Project in Alberta, Canada. Oil sands mining bears no resemblance to any of Marathon's other oil production processes. Oil sands operations more closely resemble a coal surface mine. Output from these operations is on the order of 30,000 barrels of synthetic crude per day, with significantly higher than normal refining costs.

Financial Highlights, Fiscal Year 2010.

FY2010 was a comeback year for the company. Depressed refining margins hurt the company through 2009, but stronger fuel demand and stable crude prices brought higher margins and volume from this business. Earnings doubled from the low in 2009 of $1.67 per share. FY2011 will no doubt be strengthened by the boom in oil prices, with projected earnings in the $4.50 per share range.

Reasons to Buy.

MRO's exploration is oriented toward oil, as opposed to natural gas, and that's a good thing in today's oil and gas price environment. Refining margins (known as "crack margins") have improved dramatically from a few years ago. The two subsidiaries will emerge strong and independent, as the current refining business only gets 5 percent of its input from MRO's current exploration business. The company continues to be successful with its recent exploratory wells, finding developable a.s.sets in 96 percent of its holes in 2009 and over 86 percent in the past three years.

Reasons for Caution.

The split could be a distraction and could incur some costs, but it will most likely be a "blip" in the course of business. Oil prices could decline as demand/supply balance is once again achieved in the futures markets as well as actual shipments. And refining margins can be a big question mark. The share price has advanced to the point where the current dividend yield lags some other similar companies, like Total S.A. and ConocoPhillips (both 100 Best Stocks) come to mind.

CONSERVATIVE GROWTH.

McCormick & Company, Inc.

Ticker symbol: MKC (NYSE) S&P rating: A- Value Line financial strength rating: A Current yield: 2.5%.

Company Profile.

McCormick manufactures, markets, and distributes spices, herbs, seasonings, and flavors to the global food industry. They are the largest such supplier in the world. Customers range from retail outlets and food manufacturers to foodservice businesses.

Industrial customers include foodservice, food-processing businesses, and retail outlets. The Industrial segment was responsible for 42 percent of sales and 19 percent of operating profits. A majority of the top 100 food companies are MKC's customers.

McCormick's U.S. Consumer business (58 percent of sales and 81 percent of operating profits), its oldest and largest, manufactures consumer spices, herbs, extracts, proprietary seasoning blends, sauces, and marinades. Spices are sold under an a.s.sortment of recognizable brand names: McCormick, Lawry's, Zatarain's, Thai Kitchen, Simply Asia, Clubhouse, Billy Bee, Produce Partners, Golden Dipt, Old Bay, and Mojave.

Many of the spices and herbs purchased by the company, such as black pepper, vanilla beans, cinnamon, herbs, and seeds must be imported from countries such as India, Indonesia, Malaysia, Brazil, and the Malagasy Republic. Other ingredients such as paprika, dehydrated vegetables, onion, and garlic, and food ingredients other than spices and herbs originate in the United States.

The company was founded in 1889 and has approximately 7,500 full-time employees in facilities located around the world. Major sales, distribution, and production facilities are located in North America and Europe. Additional facilities are based in Mexico, Central America, Australia, China, Singapore, Thailand, and South Africa. International sales account for about 42 percent of the total. The company has recently deployed more informative print and web content with recipes and other information to spur cooking with spices. We also like a new packaging initiative to sell prepackaged spices set to cook a particular meal called "Recipe Inspirations"; this launch has been initially successful.

Financial Highlights, Fiscal Year 2010

The spice and ingredient business is a fairly slow, steady business at most times, but, aided by a growing number of people eating at home to control expenses in response to the recession, McCormick had a good FY2010, and the stock price performed accordingly. Earnings during the year rose 15.1 percent from the comparable FY2009 period.

Through innovations and other measures (no pun intended), the company has also improved profitability, with operating margins, long stuck in the 1516 percent range, rising to 18 percent in 2009 and projected in the low 20s going forward.

FY2011 is projected to keep the same trends afloat, with the top line projected to grow between 5 and 7 percent in local currency, and a bottom line earnings projection of $2.80$2.85, again putting growth in the 16 percent range.

Reasons to Buy

McCormick's is about as "pure" a play as there is in this book. They make seasonings (spices/herbs/flavorings), a few specialty foods, and nothing else. They're the largest branded producer of seasonings in North America, and they're the largest private-label producer of seasonings in North America, giving them a substantial level of price protection. McCormick is not just a producer/supplier, howeverthey also create new seasoning products. In fact, every year since 2005, between 13 percent and 18 percent of their industrial business sales have come from new products launched in the preceding three years. Keeping up with changing tastes requires McCormick to produce that new, hot flavor and to come up with new and interesting flavors and blends of existing seasonings.

On the consumer side, as amateur cooks ourselves, we have long felt that people would use more spices if they only knew how to use them. The new information outlets, and the prepackaged Recipe Inspirations meal kits will serve well to get the less experienced cooks "across the chasm" of using spices effectively in their own cooking. In our view, these initiatives, combined with continuing growth in the health-conscious segment by learning to replace fat flavoring with spice flavoring, will add to a solid business base for the company.

McCormick's sales have increased every year for the past fifty years, and the company has paid a dividend every year since 1925. In 2010, they raised the dividend for the twenty-fifth consecutive year. As further evidence of improved profitability, the company has achieved double-digit compounded ten-year earnings, cash flow, and dividend growth despite growing sales only 6.5 percent for the period. This profitability surge and the stability and defensive nature of the company and its business present an attractive combination for investors.

Reasons for Caution

Real reasons for caution are few and far between. Top line growth is likely to remain moderate except by acquisition. Additionally, without significant innovations the current surge in profitability is likely to plateau at some point.

AGGRESSIVE GROWTH.

McDonald's Corporation

Ticker symbol: MCD (NYSE) S&P rating: A Value Line financial strength rating: A++ Current yield: 3.3%

Company Profile

McDonald's Corporation operates and franchises the ubiquitous "golden arches" McDonald's restaurants. At 2010 year-end, there were approximately 32,737 restaurants in 118 countries, over 26,000 of which were operated by franchisees and 6,200 were operated by the company. Franchisees pay for and own the equipment, signs, and interior of the businesses, and are required to reinvest in same from time to time. The company owns the land and building or secures leases for both company-operated and franchised restaurant sites.

Revenues to the company come in the form of sales from company-owned stores and rents, fees, royalties, and other revenue streams from the franchisees. The company is primarily a franchisor and has recently begun to sell off more of its company-owned stores, in the process realizing benefits to cash flow, reduced operational costs, and reduced exposure to commodities prices.

McDonald's completely dominates the fast food hamburger restaurant market segment with a 35 percent market share. Burger King and Wendy's are the next largest compet.i.tors at 4 percent market share each. In the overall fast food segment, McDonald's is still the single biggest player with a 19 percent market share by revenue, followed by Doctor's a.s.sociates, Inc. (Subway) with a 10 percent share.

The company generates about 65 percent of its revenue outside the United States.

Financial Highlights, Fiscal Year 2010