The 100 Best Stocks You Can Buy 2012 Part 27

As bad as things were during 20082010, Nucor is in better shape than most of its compet.i.tors. It has been very conservative with the business over the past five years of growth and continues to have low levels of debt.

Nucor is the lowest-cost producer in the worldits gross margin is 40 percent higher than the largest player in the industry. Its capital structure is solid and puts it in better position than any of its compet.i.tors to buy up capacity should others fail to recover quickly. Its large, rapid-start capacity positions it well to take advantage of the opportunity as demand turns around, and it is acknowledged to be one of the best-run and most innovative players in the industry.

Additionally, we feel that pent-up construction demand and especially the growing need for infrastructure replacement projects will bode well for Nucor's business. We also like the focus on shareholder returnsthe recent dividend track record is excellentnot always found in this sort of industry. Nucor is a "best in cla.s.s" player in a key industry, and should prosper in any kind of economic recovery or major infrastructure replacement cycle.

Reasons for Caution

The industry is inherently cyclical, and those who fear recessions and slowdowns, or even hints thereof, short-term investors included, should proceed with caution on this company. Nucor (and other domestic producers) still have to compete with what many claim are "dumping" practices from overseas producers, that (it is claimed) sell product in the United States below their cost in order to cripple their compet.i.tion. Investors should watch operating margins; a protracted period below 10 percent may signal trouble ahead.

AGGRESSIVE GROWTH.

Oracle Corporation

Ticker symbol: ORCL (NASDAQ) S&P rating: A Value Line financial strength rating: A++ Current yield: 0.7%

Company Profile

Oracle Corporation supplies the world's most widely used information management software, the Oracle database. It is also the world's second largest independent software company. In addition to its namesake database, Oracle also develops, manufactures, markets, distributes, and services middleware and applications software that help its customers manage their businesses. With its 2008 acquisition of Sun Microsystems and 2010 acquisition of former HP CEO Mark Hurd to run its sales and distribution organizations, Oracle has vaulted itself into a strong position as a supplier of hardware and particularly bundled hardware/software solutions targeted to such activities as data warehousing and data mining.

Oracle is organized into five reporting business segments. Sales of new software licenses accounted for 28 percent of FY2010 revenues. License updates and software product support generated 49 percent, while hardware systems generated 5.5 percent and hardware support generated 2.5 percent, and general services including consulting generating the remaining 14 percent. International sales accounted for 57 percent of revenue in FY2010.

The company's new software licenses segment includes the licensing of database and middleware software, which consists of Oracle Database and Oracle Fusion Middleware, as well as applications software. Oracle's database and middleware software provides a platform for running and managing business applications, once part of the acquired Peoplesoft business, for mid-size businesses and large global enterprises. Designed for enterprise grid computing, the Oracle Database is available in four editions, scaled to the size of the intended application. Oracle Exadata is a family of storage software and hardware products designed to improve data warehouse query performance.

Oracle Consulting a.s.sists customers in deploying its applications and technology products. The company's consulting services include business/IT strategy alignment, business process simplification, solution integration, and product implementation, enhancements, and upgrades. The company provides training to customers, partners, and employees. Oracle offers thousands of courses covering all of its product offerings.

Financial Highlights, Fiscal Year 2010 (ended June 24, 2010)

Sales rose 15 percent versus 2009, including an 8 percent contribution from the sales of Sun hardware. Earnings grew only 11 percent, as operating margin fell 130 basis points, reflecting a high level of integration costs. Disciplined cost management led to the generation of over $8 billion in free cash flow from fourth quarter 2009 through the third quarter 2010.

The company completed four notable acquisitions during the year: Relsys International in July 2009, Silver Creek Systems and Sun Microsystems in January 2010, and Phase Forward in April 2010. Relsys and Phase Forward will significantly strengthen Oracle's vertical applications for the pharmaceutical industry. More recently, ORCL acquired Art Technology Group, giving it a sizeable presence in the e-commerce applications s.p.a.ce.

During the first part of FY2011, all businesses did well. The Sun/Solaris hardware platforms and the integrated systems they support did well under new management. The first two quarters of FY2011 showed earnings $.12 per share ahead of the prior year, which might not sound like much but with 5 billion shares outstanding, that adds up, and as a percentage it was up in the 3040 percent range.

Reasons to Buy

Integration and operational excellence are the names of the game at Oracle, and in addition to strong software license revenues, the company expects to see a far more profitable hardware segment from FY2011 forward. The company emerges from the Sun and Mark Hurd acquisitions with a very strong compet.i.tive position, particularly against hardware-centered businesses like HP. New software license revenues were up 13 percent in 3Q2010. New software licenses are a strong indicator of future revenue growth in the maintenance and services business.

Oracle's Exadata product has been selling very well. Exadata is an integrated software/hardware product sold as a unit to run Oracle's database in an online transaction processing (OLTP) environment. It's designed to be easy to deploy and configure, and provide very high levels of performance due to its use of extremely low-latency storage. It's the fastest-growing product in Oracle's history and is turning over $100 million per quarter only a year after being introduced. The product should do wonders for getting Sun's hardware business off to a solid start.

The company continues to generate a lot of cash. Even with recent acquisitions, the cash h.o.a.rd rose from $18 billion at the end of FY2010 (June 2010) to almost $25 billion in November 2010. It continues to be in an excellent position to build a suite of vertical applications on integrated hardware platforms for customers willing to pay for a preconfigured solution. Research facilities, such as those in the aforementioned pharmaceutical industry, are a perfect example.

The company recently started paying a modest dividend showing a greater orientation toward longer-term shareholder value. It quadrupled the dividend to twenty cents in FY2010. The company also is buying back shares, although fairly conservatively.

Reasons for Caution

The integration of Sun will continue to be a minor question mark for a while, as it always is with the age-old question of whether a software company can really execute in a hardware business. We would also like to see the company do more to reduce the outsized 5 billion share count; with so many shares it takes a rather outsized gain in revenue or profit to even be noticed as we typically measure per share performance today.

GROWTH AND INCOME.

Otter Tail Corporation

Ticker symbol: OTTR (NASDAQ) S&P rating: BBB- Value Line financial strength rating: B+ Current yield: 5.3%

Company Profile

Otter Tail Corporation is a holding company and a mini-conglomerate operating primarily in the upper Midwest. The conglomerate is centered on and stabilized by the Otter Tail Power Company, a regulated utility serving about 130,000 customers in rural Minnesota, North Dakota, and South Dakota. The utility accounts for about 30 percent of the total business. Use of wind generation and hydro power, and lower grades of coal available in the region have driven fuel costs down to 11 percent of revenues, a very low figure for the industry. Approximately 12 percent of power generation is from wind or hydro sources.

Beyond the utility, the company operates in five other business segments: Wind Energy (18 percent of revenues) produces windmill towers through a subsidiary known as DMI Industries. A specialized flatbed trucking common carrier also resides in this segment.

The Manufacturing segment (16 percent of revenues) houses three smaller businesses. BTD Manufacturing is a metal stamping, fabricating, and laser-cutting shop supplying custom parts for agriculture, lawn care, health and fitness, and the RV industry. Sh.o.r.emaster produces and markets residential and commercial waterfront equipmentboat lifts, docks, marinas. T.O. Plastics supplies packaging and handling products for the horticultural industry.

The Plastics segment (9 percent of revenues) has two operations supplying commercial and utility grade PVC and other plastic pipe and accessories.

The Health Services segment (9 percent) has three subsidiaries engaged in the sale of diagnostic medical equipment, patient monitoring equipment and related supplies, maintenance, and shared and staffed diagnostic imaging equipment and supplies.

The Food Ingredient Processing (7 percent) segment has one business, Idaho Pacific Holdings, a manufacturer of dehydrated potato products to the snack food, bakery, and foodservice industries.

Overall, the company has 3,652 employees, and most operations are centered in the upper Midwest.

Financial Highlights, Fiscal Year 2010

While the electric utility business was fairly stable, the remainder of the Otter Tail businesses took a hit in FY2009, with a drop of some 20 percent in revenues and 35 percent in earnings for that year. FY2010 saw a partial recovery, with revenues rising 6 percent to $1.1 billion and earnings aside from a couple of non-cash impairment charges, one related to delivery problems in the wind tower segment, remaining relatively flat at $0.66 per share. The company exited Q4 FY2010 on a strong note, with a 19 percent increase in revenue and 29 percent increase in operating income year over year from Q4 FY2009. For FY2011, the company expects earnings in the $1.00$1.40 per share range on revenues approaching $1.16 billion, a wide range but reflecting other possible costs in the DMI wind tower business. The macroeconomic environment bodes well for recovery in most if not all of Otter Tail's businesses.

Reasons to Buy

If one were to look at the a.s.sortment of Otter Tail businesses, without the Otter Tail name attached, one might jump to the conclusion that this was a Berkshire Hathaway portfolio. Aside from the utility, the company operates small niche players in relatively simple, understandable businesses, all well managed with a trusting corporate parent. The utility anchors the portfolio much as Mid-American Energy anchors Berkshire'sbut there is no railroad a.n.a.logous to Burlington Northern Santa Fe, at least as of yet.

We like this combination of safety and income with the other relatively solid businessesalthough were a bit surprised about the performance of some of those businesses during the downturn. We generally like the business portfolio, and the yield exceeding 5 percent gives investors plenty of return while awaiting growth in the other businesses. We also like Otter Tail's involvement inand useof wind power. The plastics businesses also support another key strategic area in our mindsinfrastructure replacement.

One should note that cash flow far and away exceeds earnings as reported. Otter Tail is a good way to partic.i.p.ate in several well managed businesses while getting a decent current return, and is the only small cap stock on our 100 Best list, for those wanting to add a bit of small cap flavor to their portfolios. It is indeed like a "small town" company in contrast to "big city" corporate America.

Reasons for Caution

The dividend isn't presently covered by current earnings, a caution flag in any business, although at least for now is amply covered by cash flow. The utility is stable but not likely to be helped along by population growth. The subsidiary businesses have proven more volatile than expected, and the company is small enough that a glitch in product delivery, as with the wind tower business, can have a large effect on overall performance. Berkshire, by contrast, is more diversified, and has much larger "anchor" businesses.

AGGRESSIVE GROWTH.

Pall Corporation

Ticker symbol: PLL (NYSE) S&P rating: BBB Value Line financial strength rating: A Current yield: 1.3%

Company Profile